AmSouth Large Cap Fund
AmSouth Mid Cap Fund
AmSouth Enhanced Market Fund
AmSouth International Equity Fund
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
1-800-451-8382
This prospectus describes four mutual funds offered by Variable Insurance Funds
(the "Trust"):
o AmSouth Large Cap Fund, which seeks long-term capital appreciation, with
current income as a secondary objective, by investing primarily in
equity securities of large-cap U.S. companies.
o AmSouth Mid Cap Fund, which seeks capital appreciation by investing
primarily in equity securities of mid-cap companies.
o AmSouth Enhanced Market Fund, which seeks long-term capital growth by
investing in a diversified portfolio of common stocks that are
representative of the U.S. stock market.
o AmSouth International Equity Fund, which seeks capital appreciation by
investing primarily in equity securities of large foreign companies.
The Funds' goals and investment programs are described in more detail inside.
AmSouth Bank ("AmSouth") serves as the Funds' investment adviser. Bennett
Lawrence Management, LLC ("Bennett Lawrence") serves as the investment
sub-adviser of the AmSouth Mid Cap Fund. OakBrook Investments, LLC ("OakBrook")
serves as the investment sub-adviser of the AmSouth Enhanced Market Fund. Lazard
Asset Management ("Lazard") serves as the investment sub-adviser of the AmSouth
International Equity Fund.
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, AmSouth, and the sub-advisers.
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 December 29, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
RISK/RETURN SUMMARIES MANAGEMENT OF THE FUNDS
Large Cap Fund Investment Adviser and Sub-Advisers
Mid Cap Fund Portfolio Managers
Enhanced Market Fund Administrator and Distributor
International Equity Fund Servicing Agents
INVESTMENT OBJECTIVES AND STRATEGIES TAXATION
Large Cap Fund SIMILAR FUND PERFORMANCE INFORMATION
Mid Cap Fund Large Cap Fund
Enhanced Market Fund Enhanced Market Fund
International Equity Fund International Equity Fund
RISK CONSIDERATIONS GENERAL INFORMATION
VALUATION OF SHARES Description of the Trust and Its Shares
PURCHASING AND REDEEMING SHARES Miscellaneous
</TABLE>
<PAGE>
RISK/RETURN SUMMARIES
Large Cap Fund
Investment Objective
The Fund seeks long-term capital appreciation, 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 having $1 billion or more in market capitalization
that AmSouth believes have the potential to provide capital appreciation and
growth of income. AmSouth seeks to diversify the Fund's portfolio within
industries that AmSouth believes to be among the fastest growing segments of the
U.S. economy. 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 common stocks. Large-cap growth stocks may fall out of favor with
investors and may be particularly volatile in the event of earnings
disappointments or other financial difficulties. The market could favor growth
stocks to the exclusion of value stocks, or favor value stocks to the exclusion
of growth stocks, or may not favor equities at all. 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. However, AmSouth's track record
in managing a similar mutual fund is discussed under "Similar Fund Performance
Information."
<PAGE>
Mid Cap Fund
Investment Objective
The Fund seeks capital appreciation.
Principal Investment Strategies
Under normal market conditions, the Fund will invest primarily in equity
securities of companies publicly traded on U.S. exchanges that are either
included in the Russell Midcap Growth Index or have market capitalizations
within the range of such companies. The Fund intends to invest primarily in
equity securities of companies that Bennett Lawrence believes are benefiting
from major demand trends or themes affecting their industries, which are
therefore growing at a much faster rate than the overall economy. While the Fund
generally anticipates investing in common stocks, a portion of the Fund's assets
may be invested in preferred stocks or bonds 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 common stock. Growth stocks may be particularly volatile in the
event of earnings disappointments or other financial difficulties. Further,
investments in mid-cap companies typically involve greater risk than is
customarily associated with larger, more established companies due to the
greater business risks of small size, limited markets, and lesser financial
resources.
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.
<PAGE>
Enhanced Market Fund
Investment Objective
The Fund seeks long-term capital growth.
Principal Investment Strategies
Under normal market conditions, the Fund will invest primarily in a broadly
diversified portfolio of securities represented in the Standard & Poor's 500
Composite Stock Index ("S&P 500"), overweighting relative to their index weights
those that OakBrook believes to be undervalued compared to others in the S&P
500. The Fund seeks to maintain risk characteristics similar to those of the S&P
500. OakBrook's stock selection process utilizes computer-aided quantitative
analysis. OakBrook's computer models use many types of data, but emphasize
technical data such as price and volume information. Applying these models to
stocks within the S&P 500, OakBrook attempts to generate more capital growth
than that of the S&P 500.
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. Large-cap stocks may fall out of favor with
investors, and growth stocks may be particularly volatile in the event of
earnings disappointments or other financial difficulties. In addition, value
stocks may, in fact, not be undervalued, or their value may never be recognized
by the market. The market could favor growth stocks to the exclusion of value
stocks, or favor value stocks to the exclusion of growth stocks, or may not
favor equities at all.
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. However, AmSouth's track record
in managing a similar mutual fund is discussed under "Similar Fund Performance
Information."
<PAGE>
International Equity Fund
Investment Objective
The Fund seeks capital appreciation.
Principal Investment Strategies
Under normal market conditions, the Fund will invest primarily in equity
securities of large foreign companies. The Fund intends to invest primarily in
established companies in economically developed countries that Lazard believes
are undervalued as determined by their return on total capital or equity. Lazard
attempts to identify undervalued securities through traditional measures of
value, including low price to earnings ratio, high yield, unrecognized assets,
potential for management change and the potential to improve profitability.
Lazard focuses on individual stock selection (a "bottom-up" approach) rather
than on forecasting stock market trends (a "top-down" approach).
Although the Fund invests primarily in the equity securities of companies
located in developed foreign countries, it may invest in up to 25% of its total
assets in typically large companies located, or doing significant business, in
countries with emerging markets. In addition, the Fund may have substantial
investments in American and Global Depositary Receipts, which are certificates
(typically issued by a bank or trust company) evidencing ownership of underlying
foreign or domestic 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 stock. The Fund is subject to foreign investment risk.
Foreign securities may entail risks that are different from, or in addition to,
investments in the securities of domestic issuers, such as exposure to currency,
a lack of adequate company information, political instability, and differing
auditing and legal standards. This risk may be particularly acute with respect
to emerging market issuers.
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.
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 than more broadly diversified mutual funds.
<PAGE>
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. However, Lazard's track record
in managing a similar mutual fund is discussed under "Similar Fund Performance
Information."
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 AmSouth, Bennett Lawrence, OakBrook, and
Lazard act as investment adviser or sub-adviser, including mutual funds with
names, investment objectives and policies similar to the Funds. Investors should
carefully consider their investment goals and willingness to tolerate investment
risk before allocating their investment to 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).
Large Cap Fund
The Fund's investment objective is to seek long-term capital appreciation, with
current income as a secondary objective. The investment objective is not
fundamental, and may be changed without shareholder approval. Under normal
market conditions, the Fund will invest primarily in equity securities of U.S.
companies having $1 billion or more in market capitalization that AmSouth
believes have the potential to provide capital appreciation and growth of
income.
In choosing investments for the Fund, AmSouth seeks well managed U.S. companies
that have demonstrated sustained patterns of profitability, strong balance
sheets, and the potential to achieve predictable, above-average earnings growth.
AmSouth also looks for companies that pay above-average dividends for the Fund.
AmSouth anticipates diversifying the Fund's portfolio within the growth segments
of the U.S. economy, focusing on companies in the Technology, Consumer
Non-Durables, Health Care, Business Equipment and Services, Retail, and Capital
Goods sectors.
In addition to common stock, the Fund also utilizes convertible securities and
preferred stocks, which typically offer higher yields and good potential for
capital appreciation. The Fund also may invest in debt securities. The portion
of the Fund's total assets invested in common stock, preferred stock,
convertible securities, and debt securities varies according to AmSouth's
assessment of market and economic conditions and outlook.
<PAGE>
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).
Mid Cap Fund
The Fund's investment objective is capital appreciation. The investment
objective is not fundamental, and may be changed without shareholder approval.
Under normal market conditions, the Fund will invest primarily in equity
securities of companies publicly traded on U.S. exchanges that are either
included in the Russell Midcap Growth Index or have market capitalizations
within the range of such companies.
In choosing stocks for the Fund, Bennett Lawrence seeks to identify industries
that are benefiting from major demand trends or themes and are therefore growing
at a much faster rate than the overall economy. Bennett Lawrence then gathers
information on the companies that appear to be benefiting from these trends or
themes. Generally, the Fund will not invest in a company unless Bennett Lawrence
has met with the company's top management. Bennett Lawrence also attempts to
talk to suppliers, purchasers, and competitors to reinforce its analysis and
monitor the Fund's holdings.
In addition to common stock, 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 Bennett
Lawrence's assessment of market and economic conditions and outlook.
The Fund also may invest in debt securities, securities issued by foreign
companies, and American Depositary Receipts, which are U.S. dollar-denominated
receipts (typically issued by a U.S. bank or trust company) evidencing ownership
of underlying foreign securities. If the Fund invests directly in equity
securities issued by foreign companies, it will do so only if the securities are
traded in the U.S.
About the Russell Midcap Growth Index. The Russell Midcap Growth Index measures
the performance of those companies among the 800 smallest companies in the
Russell 1000 Index with higher than average price-to-book ratios and forecasted
growth. The Russell 1000 Index measures the performance of the 1000 largest U.S.
companies as determined by total market capitalization. The Russell Midcap
Growth Index is considered generally representative of the U.S. market for
mid-cap stocks. As of a recent date, the average market capitalization is
approximately $4 billion, the median market capitalization is approximately $2.5
billion, and the largest company in the Index has an approximate market
capitalization of $8.7 billion.
<PAGE>
The Fund has the flexibility to make portfolio investments and engage in other
investment techniques that are different from its principal strategies discussed
above. More information on the Fund's investment strategies may be found in the
Statement of Additional Information (see back cover).
Enhanced Market Fund
The Fund's investment objective is long-term capital growth. The investment
objective is not fundamental, and may be changed without shareholder approval.
Under normal market conditions, the Fund will invest primarily in a broadly
diversified portfolio of S&P 500 securities, overweighting relative to their
index weights those that OakBrook believes to be undervalued compared to others
in the S&P 500. The Fund seeks to maintain risk characteristics similar to that
of the S&P 500.
In managing the Fund, OakBrook uses quantitative analysis focusing on technical
data to determine the Fund's portfolio holdings. This analysis does not apply
value judgments or utilize traditional economic analysis in determining the
investment merit of a particular stock. OakBrook's emphasis on technical
analysis can result in significant shifts in portfolio holdings. However, risk
controls at the style, industry and individual stock levels help ensure that the
Fund maintains risk characteristics similar to those of the S&P 500.
Consistent with its investment objective and policies, the Fund also may invest
in equity securities not represented in the S&P 500, fixed income securities,
corporate bonds, notes, warrants, and short-term money market instruments. In
addition, OakBrook may use derivative instruments for risk management purposes
or as part of the Fund's investment strategies. Derivative instruments are
financial contracts whose value depends on, or is derived from, the value of an
underlying asset, reference rate or index, and may relate to stocks, bonds,
interest rates, currencies or currency exchange rates, commodities, or related
indexes. The types of derivative instruments that OakBrook may use include, but
are not limited to, futures contracts (an agreement to buy or sell an asset in
the future at an agreed-upon price) and options (which represent a right or
obligation to buy or sell an asset at a predetermined price in the future).
About the S&P 500. The Standard & Poor's 500 Composite Stock Price Index is an
unmanaged index containing stocks of 500 industrial, transportation, utility and
financial companies, regarded as generally representative of the U.S. stock
market.
The Fund has the flexibility to make portfolio investments and engage in other
investment techniques that are different from its principal strategies discussed
above. More information on the Fund's investment strategies may be found in the
Statement of Additional Information (see back cover).
<PAGE>
International Equity Fund
The Fund's investment objective is capital appreciation. The investment
objective is not fundamental, and may be changed without shareholder approval.
Under normal market conditions, the Fund will invest primarily in equity
securities of large foreign companies. The percentage of the Fund's assets
invested in particular geographic sectors may shift from time to time in
accordance with the judgment of the portfolio manager. Ordinarily, the Fund
invests in at least three different foreign countries.
Lazard seeks to invest in equity securities that it believes represent
investment value, based on traditional measures of value, including low price to
earnings ratio, high yield, unrecognized assets, potential for management change
and the potential to improve profitability.
In addition to common stock, the Fund may also utilize fixed income securities,
including preferred stock and convertible securities, and money market
instruments. The Fund will not invest in fixed income securities rated lower
than investment grade by nationally recognized rating organizations, or, if
unrated, deemed to be of comparable quality by Lazard. The portion of the Fund's
total assets invested in stock or fixed income securities varies according to
Lazard's assessment of market and economic conditions and outlook.
The Fund may engage in forward foreign currency exchange contracts in an attempt
to hedge its exposure to currency risks associated with its foreign investments,
or to try to enhance its return. The Fund's success in these transactions will
depend principally on Lazard's ability to predict accurately the future exchange
rates between foreign currencies and the U.S. dollar. In addition, the Fund may
also engage in short-selling, which involves selling a security it does not own
in anticipation of a decline in the market price of the security. To complete
the transaction, the Fund must borrow the security to make delivery to the
buyer, and then purchase the security to replace the borrowed security.
The Fund has the flexibility to make portfolio investments and engage in other
investment techniques that are different from its principal strategies discussed
above. More information on the Fund's investment strategies may be found in the
Statement of Additional Information (see back cover).
RISK CONSIDERATIONS
Each Fund's investment strategies may subject it to a number of risks, including
the following.
Market Risk (All Funds)
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.
<PAGE>
To the extent a Fund concentrates its investments in growth stocks, it will be
subject to the risks particular to growth stocks, as well as the risk that
growth 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.
The Funds, and particularly the Enhanced Market Fund and the International
Equity Fund, also may invest in value stocks, which in theory limit downside
risk because they are underpriced. Of course, the adviser's or sub-adviser'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 that a Fund invests in value stocks
or attempts to moderate potential volatility by investing in dividend-paying
growth stocks, the Fund may produce more modest gains than equity funds with
more aggressive investment profiles.
Because industries, companies or countries experiencing economic growth and
benefiting from demand trends and themes can change, a Fund's performance could
suffer if the adviser or sub-adviser is slow to respond to such changes. From
time to time, the stock market may not favor the type of securities in which a
Fund typically invests. Rather, the market could favor other types of
securities, or it may not favor equities at all.
Foreign Investment Risk (Mid Cap Fund and International Equity Fund)
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. Further, transaction costs in foreign jurisdictions may be higher,
which can result in lower returns or decreased liquidity. 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. While investment in American and Global
Depositary Receipts do not eliminate all of the risks inherent in foreign
investing, investing in Depositary Receipts rather than directly in a foreign
issuer's securities avoids currency risks during the settlement period for
purchases and sales.
Emerging Market Risk (International Equity Fund)
Emerging market countries have economic structures that are generally less
diverse and mature, and political systems that are less stable, than those of
more developed countries. As a result, these markets may be more volatile and
pose risks in addition to, or to a greater extent than, those generally posed by
foreign investing.
<PAGE>
Mid-Cap Investment Risk (Mid Cap Fund)
While potentially offering greater opportunities for capital growth than larger,
more established companies, the stocks of mid-cap companies may be more
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 securities of these companies may trade less frequently and in
more limited volume than those of larger, more established companies. As a
result, mid-cap stocks, and thus the Fund's shares, may fluctuate more in value
than larger-cap stocks and funds that invest in them.
Interest Rate Risk (All Funds)
Although each Fund's primary investment focus is stocks, it may invest in fixed
income securities, such as convertible bonds, preferred stocks and debt
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 a 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 (All Funds)
Each Fund's investments, and particularly investments in fixed income
securities, may be affected by the creditworthiness of issuers in which a 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.
Derivatives Risk (Enhanced Market Fund and International Equity Fund)
A Fund's use of derivative instruments may involve risks different from, or
greater than, the risks associated with investing directly in securities or
other traditional investments. Derivatives may be subject to market risk,
interest rate risk, and credit risk, as discussed above. Certain derivatives may
be illiquid, which may reduce the return of a Fund if it cannot sell or
terminate the derivative instrument at an advantageous time or price. Some
derivatives may involve the risk of mispricing or improper valuation, or the
risk that changes in the value of the instrument may not correlate well with the
underlying asset, rate or index. A Fund could lose the entire amount of its
investment in a derivative and, in some cases, could lose more than the
principal amount invested. Also, suitable derivative instruments may not be
available in all circumstances, and there is no assurance that a Fund will be
able to engage in these transactions to reduce exposure to other risks.
<PAGE>
Lack of Diversification (International Equity Fund)
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.
Active Trading (All Funds)
The Funds will not generally trade in securities for short-term profits.
However, each Fund is actively managed and, under appropriate circumstances, may
purchase and sell securities without regard to the length of time held. A high
portfolio turnover rate may increase transaction costs, which may negatively
impact a Fund's performance.
Temporary Investments (All Funds)
AmSouth, Bennett Lawrence, OakBrook and Lazard 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 a 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 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 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 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 NYSE is open for trading. If
portfolio investments of a Fund are traded in markets on days that are not
Business Days of the Fund, the Fund's net asset value may vary on days when
investors cannot purchase or redeem shares.
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 each Fund will fluctuate as the value of the investment portfolio
of the Fund changes.
<PAGE>
The securities in each Fund will be valued at market value. If market quotations
are not available, the securities will be valued by a method which the Board of
Trustees 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 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, its
investment adviser, and its investment sub-adviser (if any). Each Fund reserves
the right to reject or refuse, in its discretion, any order for the purchase of
the Fund's shares, in whole or in part.
Shares of each 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 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 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 account that invests in the Fund.
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 life insurance policies for which the Funds
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 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.
<PAGE>
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 a 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 and Sub-Advisers
AmSouth. AmSouth Bank, 1901 Sixth Avenue North, Birmingham, Alabama 35203, is
the investment adviser for the Funds. AmSouth is the principal bank affiliate of
AmSouth Bancorporation, one of the largest banking institutions headquartered in
the mid-south region. AmSouth Bancorporation reported assets as of September 30,
2000 of $39 billion and operated more than 660 banking offices in Alabama,
Florida, Georgia, Mississippi, Louisiana and Tennessee. AmSouth has provided
investment management services through its Trust Investment Department since
1915. As of June 30, 2000, AmSouth and its affiliates had over $15 billion in
assets under discretionary management and provided custody services for an
additional $12 billion in securities. 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 each Fund, AmSouth is
authorized to manage the Funds, 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 calculated as a percentage of each Fund's average daily net assets,
which is computed daily and paid monthly at the annual rates indicated below, or
(b) such amount as may from time to time be agreed upon in writing by the Trust
and AmSouth.
<TABLE>
<S> <C>
Percentage of
average daily net assets
--------------------------------------------------------------------------------------------------------------------
Large Cap Fund 0.70%
--------------------------------------------------------------------------------------------------------------------
Mid Cap Fund 0.90%
--------------------------------------------------------------------------------------------------------------------
Enhanced Market Fund 0.45%
---------------------------------------------------------------------------------------------------------------------
International Equity Fund 1.00%
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Bennett Lawrence. Bennett Lawrence Management, LLC serves as investment
sub-adviser of the Mid Cap Fund in accordance with a sub-advisory agreement with
AmSouth. Bennett Lawrence makes the day-to-day investment decisions for the Mid
Cap Fund and continuously reviews, supervises and administers the Mid Cap Fund's
investment program, subject to the general supervision of the Board of Trustees
and AmSouth in accordance with the Mid Cap Fund's investment objective, policies
and restrictions. For its services and expenses incurred under the sub-advisory
agreement, Bennett Lawrence is entitled to a fee payable by AmSouth.
Bennett Lawrence provides discretionary investment management services to client
discretionary accounts totaling approximately $1.652 billion as of December 31,
1999. Its principal offices are located at 757 Third Avenue, New York, New York
10017.
OakBrook. OakBrook Investments, LLC serves as investment sub-adviser of the
Enhanced Market 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.
Lazard. Lazard Asset Management, located at 30 Rockefeller Plaza, New York, New
York 10112-6300, serves as sub-investment adviser to the International Equity
Fund in accordance with a sub-advisory agreement with AmSouth. Lazard 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, Lazard is entitled to a fee payable
by AmSouth.
Lazard is a division of Lazard Freres & Co. LLC, which is a New York limited
liability company, and, together with its affiliates, provides investment
management services to client discretionary accounts with assets totaling
approximately $71.6 billion as of September 30, 2000.
Portfolio Managers
Large Cap Fund: Ronald E. Lindquist is the portfolio manager of the Large Cap
Fund. He has been employed by First American National Bank since May 1998 and
has been employed by AmSouth since December 1999. Prior to May 1998, he was
employed since 1978 by Deposit Guaranty National Bank and Commercial National
Bank, affiliates of AmSouth.
<PAGE>
Mid Cap Fund: S. Van Zandt Schreiber and Robert W. Deaton are the portfolio
managers of the Mid Cap Fund. Mr. Schreiber has been the Chief Portfolio Manager
at Bennett Lawrence since its inception in August 1995. For more than five years
prior thereto, Mr. Schreiber was Managing Director and Senior Growth Portfolio
Manager with Deutsche Morgan Grenfell/C.J. Lawrence, Inc. Mr. Deaton has been an
Associate Portfolio Manager at Bennett Lawrence since its inception in August
1995. From 1994 to August 1995, Mr. Deaton was a portfolio manager and research
analyst with Deutsche Morgan Grenfell/C.J. Lawrence, Inc. Prior thereto, Mr.
Deaton managed the Long-Term Growth Fund for the Tennessee Consolidated
Retirement System.
Enhanced Market Fund: 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.
International Equity Fund: The Fund is managed on a team basis. Herbert W.
Gullquist and John R. Reinsberg are the principal persons who are primarily
responsible for the day to day management of the International Equity Fund.
Messrs. Gullquist and Reinsberg have been the International Equity Fund's
principal managers since its inception, and have been Managing Directors of
Lazard for over five years.
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
Funds' service providers.
<PAGE>
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 each 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.
SIMILAR FUND PERFORMANCE INFORMATION
The following tables provide information concerning the historical total return
performance of the Class A shares of various series of the AmSouth Funds that
have investment objectives, policies and strategies that are substantially
similar to those of the indicated Funds, and that are currently managed by the
same investment advisers/sub-advisers and portfolio managers ("Similar Funds").
While the investment objectives, policies and risks of a Similar Fund and its
corresponding Fund 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 the adviser and sub-advisers in managing a
substantially similar investment portfolio 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.
<PAGE>
The performance data shown below reflects the net operating expenses of the
Similar Funds, which are lower than the estimated operating expenses of the
corresponding Funds (prior to fee waivers and/or expense reimbursements).
Performance would have been lower for a Similar Fund if the corresponding Fund's
expenses (before waiver and/or reimbursement) were used. In addition, 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
vehicle. By contrast, investors with contract value allocated to a 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. Performance for the
AmSouth Large Cap Fund and the AmSouth International Equity Fund prior to March
13, 2000 reflects the performance of the Similar Funds as series of the ISG
Funds.
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 a
Similar Fund or a 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
indexes identified below does not reflect the fees or expenses of the Similar
Fund or the Fund.
<PAGE>
Large Cap 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 5 Years 10 Years Since Inception Inception Date
---------------------- ------ ------- -------- --------------- --------------
AmSouth Large Cap Fund*
. Assuming imposition of maximum 13.49% 27.57% N/A 19.86% 8/3/92
sales charge
. Absent imposition of sales charge 18.85% 28.74% N/A 20.61% 8/3/92
S&P 500(R) Index** 21.03% 28.54% N/A 20.84% 7/31/92
-----------------
* 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.
** The Standard & Poor's 500 Composite Stock Price Index is an unmanaged
index containing 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.
Enhanced Market Fund
Average Annual Total Return for the Similar Fund and for Its Benchmark Index for
Periods Ended December 31, 1999
Similar Fund/Benchmark 1 Year 5 Years 10 Years Since Inception Inception Date
---------------------- ------ ------- -------- --------------- --------------
AmSouth Enhanced Market Fund*
. Assuming imposition of maximum 15.62% N/A N/A 34.50% 9/1/98
sales charge
. Absent imposition of sales charge 21.05% N/A N/A 39.22% 9/1/98
S&P 500(R) Index** 21.03% N/A N/A 26.04% 9/1/98
-----------------
* 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.
** The Standard & Poor's 500 Composite Stock Price Index is an unmanaged
index containing 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.
<PAGE>
International Equity Fund
Average Annual Total Return for the Similar Fund and for Its Benchmark Index for
Periods Ended December 31, 1999
Similar Fund/Benchmark 1 Year 5 Years 10 Years Since Inception Inception Date
---------------------- ------ ------- -------- --------------- --------------
AmSouth International Equity Fund*
o Assuming imposition of maximum 20.73% N/A N/A 11.19% 8/15/97
sales charge
o Absent imposition of sales charge 26.77% N/A N/A 13.37% 8/15/97
EAFE Index** 20.33% N/A N/A 5.62% 7/31/97
-----------------
* 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.
** The Morgan Stanley Capital International Europe, Australasia, Far East
("EAFE") Index is a widely recognized, unmanaged index of foreign
securities representing major non-U.S. stock markets.
</TABLE>
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 fourteen 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 Funds or its
distributor. This prospectus does not constitute an offering by the Funds or its
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: 1-800-451-8382
--------------------------------------------------------------------------------
Investors can review and copy the SAI and other information about the Funds 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 Funds:
. For a fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-0102 or by electronic request at [email protected].
. 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
1-888-451-8382
STATEMENT OF ADDITIONAL INFORMATION
December 29, 2000
This Statement of Additional Information ("SAI") describes five series (each a
"Fund" and collectively the "Funds") of Variable Insurance Funds (the "Trust").
The Funds are:
o AmSouth Large Cap Fund;
o AmSouth Mid Cap Fund;
o AmSouth Enhanced Market Fund;
o AmSouth Capital Growth Fund; and
o AmSouth International Equity 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 adviser and sub-adviser (if applicable) 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 the Prospectus of the Funds, dated December 29, 2000
as supplemented from time to time. This SAI contains more detailed information
than that set forth in the Prospectus and should be read in conjunction with the
Prospectus. This SAI is incorporated by reference in its entirety into the
Prospectus. Copies of the 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
Bank Obligations......................................................1
Commercial Paper......................................................2
Variable And Floating Rate Demand Notes...............................2
Short-Term Obligations................................................3
Corporate Debt Securities.............................................3
Foreign Investments...................................................4
Securities Of Foreign Governments And Supranational Organizations.....6
Funding Agreements....................................................6
U.S.Government Obligations............................................6
Options...............................................................7
Forward Commitments, When-Issued and Delayed-Delivery Securities......9
Mortgage-Related and Asset-Backed Securities.........................10
Illiquid and Restricted Securities...................................12
Investment Companies.................................................13
Lending of Portfolio Securities......................................13
Convertible Securities...............................................13
Warrants.............................................................14
Repurchase Agreements................................................14
Reverse Repurchase Agreements........................................15
Futures Contracts and Options Thereon................................15
Regulatory Restrictions..............................................16
INVESTMENT RESTRICTIONS.......................................................16
Portfolio Turnover...................................................18
NET ASSET VALUE...............................................................18
Valuation of the Fund................................................18
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................19
MANAGEMENT OF THE TRUST.......................................................19
Trustees and Officers................................................19
Investment Adviser...................................................22
Investment Sub-Advisers..............................................23
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
Codes of Ethics......................................................29
ADDITIONAL INFORMATION........................................................30
Description of Shares................................................30
Vote of a Majority of the Outstanding Shares.........................31
Shareholder and Trustee Liability....................................31
Additional Tax Information...........................................32
Distributions........................................................34
Hedging Transactions.................................................34
Other Taxes..........................................................35
Performance Information..............................................35
Miscellaneous........................................................36
FINANCIAL STATEMENTS..........................................................37
APPENDIX ......................................................................i
<PAGE>
The Trust is an open-end management investment company which currently offers
fourteen series. This SAI contains information about the AmSouth Large Cap Fund,
which is advised by AmSouth Bank ("AmSouth"), the AmSouth Mid Cap Fund, which is
advised by AmSouth, with Bennett Lawrence Management, LLC ("Bennett Lawrence")
serving as sub-adviser, the AmSouth Enhanced Market Fund, which is advised by
AmSouth, with OakBrook Investments, LLC ("OakBrook") serving as sub-adviser, the
AmSouth Capital Growth Fund, which is advised by AmSouth, and the AmSouth
International Equity Fund, which is advised by AmSouth, with Lazard Asset
Management ("Lazard") serving as sub-adviser. The Large Cap Fund, Mid Cap Fund,
and Enhanced Market Fund are diversified series, while the Capital Growth Fund
and International Fund are not.
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 the Prospectus. 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 Prospectus.
Bank Obligations. The 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.
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.
Each 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.
<PAGE>
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 organizations
("NRSROs") (e.g., A-2 or better by Standard & Poor's Ratings Service ("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 each 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.
<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 the Fund's portfolio and, in such circumstances, will
constitute a temporary suspension of its attempts to achieve its investment
objective.
Corporate Debt Securities. The Funds 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, AmSouth, Bennett
Lawrence, OakBrook, and Lazard 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.
Except for the Capital Growth Fund, the Funds 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.
<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
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 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.
After purchase, a security may cease to be rated or its rating may be reduced
below the minimum required for purchase by a Fund. Neither event will require a
sale of such security. However, AmSouth, Bennett Lawrence, OakBrook, and Lazard
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.
The Capital Growth Fund may invest in High-yield/High-risk/debt securities.
These securities are rated below investment grade by the primary rating agency
(e.g., BB or lower by Standard & Poor's and Ba or lower by Moody's).
These securities are considered speculative and involve greater risk of loss
than investment grade debt securities. Other terms commonly used to describe
such securities include "lower rated bonds," "noninvestment grade bonds" and
"junk bonds."
Foreign Investments. The Funds may invest in foreign securities, and the
International Equity Fund will focus its investments in such 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, expropriation, and nationalization of assets. 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. 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.
In addition, diplomatic developments could also affect the value of a Fund's
investments. 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>
Additionally, the Funds may invest in countries with emerging economies.
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 issues located in these 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. Such changes also may affect the income and distributions
to Shareholders of a Fund. 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. 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.
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 and trust companies. 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.
<PAGE>
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 Funds may invest in
both sponsored and unsponsored ADRs.
Securities Of Foreign Governments And Supranational Organizations. The Funds 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 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, as discussed above
in "Foreign Investments."
Funding Agreements. The Funds may purchase funding agreements, under which a
Fund invests an amount of cash with an insurance company and the insurance
company credits such investment on a monthly basis with guaranteed interest
which is based on an index. These agreements provide that the guaranteed
interest will not be less than a certain minimum rate. These agreements also
provide for adjustment of the interest rate monthly and are considered variable
rate instruments.
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 a Fund may invest do not include Certificates of Accrual on
Treasury Securities ("CATS") or Treasury Income Growth Receipts ("TIGRs").
<PAGE>
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 Funds may also invest in "zero coupon" U.S. Government securities. These
securities tend to be more volatile than other types of U.S. Government
securities. Zero coupon securities are debt instruments that do not pay current
interest and are typically sold at prices greatly discounted from par value. The
return on a zero coupon obligation, when held to maturity, equals the difference
between the par value and the original purchase price.
Options. The Funds may purchase put and call options on securities and
securities indices 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 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, 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 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,
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.
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 a 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.
<PAGE>
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 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, a 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 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 a Fund.
Once the decision to write a call option has been made, AmSouth and a
sub-adviser, 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 a 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 a 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. The Funds 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.
<PAGE>
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.
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.
Forward Commitments, When-Issued and Delayed-Delivery Securities. The Funds 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, a Fund may purchase and 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.
<PAGE>
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 the 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. A 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 Fund 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.
Mortgage-related securities in which a 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 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 a Fund will receive when these amounts are
reinvested.
<PAGE>
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage related securities
and among the securities that they issue. Mortgage-related securities issued by
GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee. Mortgage-related securities issued by FNMA include FNMA
Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of FNMA and are not backed by or entitled to
the full faith and credit of the United States. FNMA is a government-sponsored
organization owned entirely by private stockholders. Fannie Maes are guaranteed
as to the timely payment of the principal and interest by FNMA. Mortgage-related
securities issued by FHLMC include FHLMC Mortgage Participation Certificates
(also known as "Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality of
the United States, created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Banks and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. Freddie Macs
entitle the holder to the timely payment of interest, which is guaranteed by
FHLMC. FHLMC guarantees either ultimate collection or the timely payment of all
principal payments on the underlying mortgage loans. When FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.
The 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, a 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 Funds 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. 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>
AmSouth or a sub-adviser may deem Section 4(2) securities liquid if it believes
that, based on the trading markets for such security, such security can be
disposed of within seven days in the ordinary course of business at
approximately the amount at which a 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.
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 Investment Company Act of 1940,
as amended (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, or other collateral. This collateral must be valued daily, and
should the market value of the loaned securities increase, the borrower must
furnish additional collateral to the lender. During the time portfolio
securities are on loan, the borrower pays the lender any dividends or interest
paid on such securities. Loans are subject to termination by the lender or the
borrower at any time. While a Fund does not have the right to vote securities on
loan, each 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 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 Funds 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.
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 AmSouth or a 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 Funds, AmSouth or a sub-adviser evaluate the
investment characteristics of the convertible security as a fixed income
instrument, and the investment potential of the underlying equity security for
capital appreciation. In evaluating these matters with respect to a particular
convertible security, AmSouth or a 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.
Warrants. The Funds 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 a 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 AmSouth or a sub-adviser deem 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.
<PAGE>
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 segregate 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 a
Fund is delayed or prevented from completing the transaction.
Futures Contracts and Options Thereon. The Funds may enter into contracts for
the future delivery of securities and futures contracts based on a specific
security, class of securities, interest rate, index, and may 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. Each 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 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, a Fund can seek through the sale
of futures contracts to offset a decline in the value of its portfolio
securities. When interest rates are expected to fall or market values are
expected to rise, a Fund, 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 a regulated investment
companies.
<PAGE>
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 a Fund may lose the expected benefit of futures transactions if interest
rates or securities prices 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, limiting the Fund's ability to hedge effectively
against interest 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, a
Fund will segregate 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 the Fund plus premiums paid by it for open options on futures
would exceed 5% of such Fund's total assets. A 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 a 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 following investment restrictions may be changed with respect to a
particular Fund only by a vote of a majority of the outstanding Shares of that
Fund (as defined under "ADDITIONAL INFORMATION -- Vote of a Majority of the
Outstanding Shares" in this SAI).
<PAGE>
The Funds 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. Borrow money or issue senior securities, except as permitted under
the Investment Company Act of 1940, as amended, and as interpreted, modified or
otherwise permitted by regulatory authority having jurisdiction from time to
time;
3. Make loans, except as permitted under the Investment Company Act of
1940, as amended, and as interpreted, modified or otherwise permitted by
regulatory authority having jurisdiction from time to time;
4. 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";
5. Purchase or sell commodities or commodities contracts, except to the
extent disclosed in the current Prospectus and/or SAI of the Fund; and
6. 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, the Funds may not:
1. Purchase or otherwise acquire any securities if, as a result, more
than 15% of a 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
rate for 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 Fund 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 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. The value of foreign securities may be affected
significantly on a day that the NYSE is closed and an investor is not able to
purchase or redeem shares. 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 Funds 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 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 (or other agent of a Fund) 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.
<PAGE>
The names of the Trustees, their addresses, ages, and principal occupations
during the past five years are set forth below:
<TABLE>
<S> <C>
Name, Address, and Age Principal Occupation During Past 5 Years
---------------------- ----------------------------------------
James H. Woodward Chancellor, University of North Carolina at Charlotte.
University of North Carolina
at Charlotte
Charlotte, NC 28223
Age: 60
Michael Van Buskirk Chief Executive Officer, Ohio Bankers Association
37 West Broad Street (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
------------------------
</TABLE>
* 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:
<TABLE>
<S> <C> <C>
Aggregate Compensation Total Compensation from
Name from Trust* Fund Complex**
---- ------------------------ --------------
James H. Woodward $4,000 $ 20,750
Michael Van Buskirk $4,000 $ 4,000
Walter B. Grimm $0 $ 0
</TABLE>
* 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.
<PAGE>
The officers of the Trust, their addresses, ages, and principal occupations
during the past five years are as follows (unless otherwise indicated, the
address of each officer is 3435 Stelzer Road, Columbus, OH 43219):
<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 (4/91 -
Secretary Present).
Alaina Metz Secretary Employee of BISYS Fund Services (6/95 -
Age: 33 present).
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).
</TABLE>
<PAGE>
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 October 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 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, each of the
Funds is obligated to pay AmSouth 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: 0.70% for the AmSouth Large Cap Fund and .90% for the
AmSouth Mid Cap Fund, 0.45% for the AmSouth Enhanced Market Fund, 0.70% for the
AmSouth Capital Growth Fund, and 1.00% for the AmSouth International Equity
Fund.
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.
<PAGE>
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 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 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.
Investment Sub-Advisers
Mid Cap Fund
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 AmSouth Mid Cap Fund by Bennett
Lawrence Management, LLC, 757 Third Avenue, New York, New York, pursuant to a
sub-advisory agreement with AmSouth.
Under the sub-advisory agreement with Bennett Lawrence, Bennett Lawrence has
agreed to provide investment advisory services for the Fund as described in the
Prospectus describing the Fund. For its services and expenses incurred under the
sub-advisory agreement, Bennett Lawrence is entitled to a fee payable by
AmSouth. The fee is computed daily and paid monthly at an annual rate of 0.42%
of the Fund's average daily net assets or such lower fee as may be agreed upon
in writing by AmSouth and Bennett Lawrence, provided that if AmSouth waives a
portion of its investment advisory fee, Bennett Lawrence has agreed that its
sub-advisory fee shall not exceed 0.60% of AmSouth's net investment advisory
fee.
Enhanced Market Fund
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 AmSouth Enhanced Market Fund by
OakBrook Investments, LLC, 701 Warrenville Road, Suite 135, Lisle, Illinois
60532, pursuant to a sub-advisory agreement with AmSouth.
Under the sub-advisory agreement with OakBrook, OakBrook has agreed to provide
investment advisory services for the Fund as described in the Prospectus
describing the 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 .32% 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 a portion of its
investment advisory fee, OakBrook has agreed that its sub-advisory fee shall not
exceed 0.70% of AmSouth's net investment advisory fee.
<PAGE>
International Equity Fund
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 AmSouth International Equity Fund by
Lazard Asset Management, 30 Rockefeller Plaza, New York, New York 10112-6300,
pursuant to a sub-advisory agreement with AmSouth.
Under the sub-advisory agreement with Lazard, Lazard has agreed to provide
investment advisory services for the Fund as described in the Prospectus
describing the Fund. For its services and expenses incurred under the
sub-advisory agreement, Lazard is entitled to a fee payable by AmSouth. The fee
is computed daily and paid monthly at an annual rate of 0.50% of the Fund's
average daily net assets.
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 agreement or interested persons (as defined in the 1940 Act) of
any party to the 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 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 AmSouth or the applicable 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 AmSouth,
the Trust or the Fund in connection with the performance of its duties, except
that the sub-adviser shall be liable to AmSouth for a loss resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of 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 the
sub-advisers'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, a Fund, 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, Bennett Lawrence, OakBrook, or Lazard in their
best judgment and in a manner deemed fair and reasonable to Shareholders. In
selecting a broker or dealer, AmSouth, Bennett Lawrence, OakBrook or Lazard may
evaluate 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, Bennett
Lawrence, OakBrook, or Lazard or may receive orders for transactions on behalf
of a 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 AmSouth,
Bennett Lawrence, OakBrook, or Lazard informed concerning overall economic,
market, political and legal trends. Under some circumstances, AmSouth, Bennett
Lawrence, OakBrook, or Lazard'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, Bennett Lawrence, OakBrook, or Lazard and
does not reduce the fees payable to AmSouth by a Fund or to Bennett Lawrence,
OakBrook, or Lazard by AmSouth. Such information may be useful to AmSouth,
Bennett Lawrence, OakBrook, and Lazard in serving both a 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 a Fund. While
AmSouth, Bennett Lawrence, OakBrook, and Lazard generally seek competitive
commissions, a Fund may not necessarily pay the lowest commission available on
each brokerage transaction for reasons discussed above.
<PAGE>
Investment decisions for each Fund are made independently from those for any
other portfolio, investment company or account managed by AmSouth, Bennett
Lawrence, OakBrook, or Lazard. Any such other portfolio, investment company or
account may also invest in the same securities as a Fund. When a purchase or
sale of the same security is made at substantially the same time on behalf of a
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 AmSouth, Bennett Lawrence, OakBrook, or Lazard 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, Bennett Lawrence, OakBrook, or Lazard
may aggregate the securities to be sold by or purchased for a Fund with those to
be sold or purchased for other portfolios, investment companies or accounts in
order to obtain best execution.
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 Funds contemplated by the Prospectus, this SAI, and
the Investment Advisory Agreements 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 a 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 each Fund (other than
those performed by AmSouth under the Investment Advisory Agreement, by Bennett
Lawrence under the Sub-Advisory Agreement, by BISYS Ohio as fund accountant and
dividend disbursing agent, and by the Fund's custodian. 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 AmSouth under
the Investment Advisory Agreement, by the sub-advisers. The sub-advisory
agreement, by the other investment advisers of the Trust's portfolios, by the
fund accountant and dividend disbursing agent, and by the Funds' 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,
respectively, 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.
<PAGE>
Expenses
AmSouth, Bennett Lawrence, OakBrook, Lazard, and the Administrator each 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
AmSouth serves as custodian to the Funds pursuant to a Custody Agreement dated
as of September 16, 1997, as supplemented. 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.
<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 the
custodian, affirmation to the custodian of portfolio trades and cash
settlements, verification and reconciliation with the custodian 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 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, 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.
Codes of Ethics
The Trust, AmSouth, Bennett Lawrence, OakBrook, Lazard, 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, Bennett Lawrence, OakBrook,
Lazard, 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 fourteen series of Shares which represent interests in each
series of the Trust. The Trust's Declaration of Trust authorizes the Board of
Trustees to divide or redivide any unissued Shares of the Trust into one or more
additional series or classes by setting or changing in any one or more respects
their respective preferences, conversion or other rights, voting power,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption.
Shares have no subscription or preemptive rights and only such conversion or
exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectus and this SAI, the Trust's
Shares will be fully paid and non-assessable by the Trust. In the event of a
liquidation or dissolution of the Trust, Shareholders of a Fund are entitled to
receive the assets available for distribution belonging to that Fund, and a
proportionate distribution, based upon the relative asset values of the
respective series, of any general assets not belonging to any particular series
which are available for distribution.
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 interests of each 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 Fund 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 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.
<PAGE>
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.
<PAGE>
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 a 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 a 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 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. A
Fund's investment objective and 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
the 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 a 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.
<PAGE>
Yields of the Funds are computed by analyzing net investment income per Share
for a recent 30-day period and dividing that amount by a Share's maximum
offering price (reduced by any undeclared earned income expected to be paid
shortly as a dividend) on the last trading day of that period. Net investment
income will reflect amortization of any market value premium or discount of
fixed income securities (except for obligations backed by mortgages or other
assets) and may include recognition of a pro rata portion of the stated dividend
rate of dividend paying portfolio securities.
The yield of the Funds will vary from time to time depending upon market
conditions, the composition of a Fund's portfolio and operating expenses of the
Trust allocated to a 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 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 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 Russell Midcap Growth 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.
The Funds may also compute aggregate total return for specified periods. The
aggregate total return is determined by dividing the net asset value of this
account at the end of the specified period by the value of the initial
investment and is expressed as a percentage. Calculation of aggregate total
return assumes reinvestment of all income dividends and capital gain
distributions during the period.
<PAGE>
The Funds also may quote annual, average annual and annualized total return and
aggregate total return performance data for various periods other than those
noted above. Such data will be computed as described above, except that the
rates of return calculated will not be average annual rates, but rather, actual
annual, annualized or aggregate rates of return.
Quotations of yield or total return for the Funds will not take into account
charges and deductions against a Separate Account to which the Funds' Shares are
sold or charges and deductions against the Variable Contracts. The Funds' yield
and total return should not be compared with mutual funds that sell their shares
directly to the public since the figures provided do not reflect charges against
the Separate Accounts or the Variable Contracts. Performance information for a
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 a Fund will request voting instructions from variable contract
owners and will vote shares or other voting interests in the Separate Account in
proportion of the voting instructions received.
The Trust is registered with the Securities and Exchange Commission as a
management investment company. Such registration does not involve supervision by
the Securities and Exchange Commission of the management or policies of the
Trust.
The Prospectus and this SAI omit certain of the information contained in the
Registration Statement filed with the Securities and Exchange Commission. Copies
of such information may be obtained from the Securities and Exchange Commission
upon payment of the prescribed fee.
The Prospectus and this SAI are not an offering of the securities herein
described in any state in which such offering may not lawfully be made. No
salesman, dealer, or other person is authorized to give any information or make
any representation other than those contained in the Prospectus and this SAI.
FINANCIAL STATEMENTS
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.
<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.