Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
(800) 257-5872
STATEMENT OF ADDITIONAL INFORMATION
June 1, 1997
This Statement of Additional Information ("SAI") describes the seven diversified
investment portfolios (the "Funds") of Variable Insurance Funds (the "Trust").
The Funds are:
o Variable Insurance Allocated Conservative Fund;
o Variable Insurance Allocated Balanced Fund;
o Variable Insurance Allocated Growth Fund;
o Variable Insurance Allocated Aggressive Fund;
o Variable Insurance Money Market Fund;
o BB&T Growth and Income Fund; and
o BB&T Capital Manager Fund.
The Trust offers an indefinite number of transferable units ("Shares") of each
Fund. Shares of the Allocated Funds and the Variable Insurance Money Market Fund
currently are sold to a segregated asset account (a "Separate Account") of
Nationwide Life and Annuity Insurance Company ("Nationwide") to serve as the
investment medium for variable annuity contracts ("Variable Contracts") issued
by Nationwide, while Shares of the BB&T Growth and Income Fund and the BB&T
Capital Manager Fund currently are sold to a segregated asset account (also a
"Separate Account") of Hartford Life Insurance Company ("Hartford") to serve as
the investment medium for Variable Contracts issued by Hartford. Shares of the
Funds also are sold to qualified pension and retirement plans outside of the
separate account context. The Separate Accounts invest in shares of the Funds in
accordance with allocation instructions received from owners of the Variable
Contracts ("Variable Contract Owners").
This SAI is not a Prospectus and is authorized for distribution only when
preceded or accompanied by a Prospectus of the Funds, dated or supplemented the
date hereof. This SAI contains more detailed information than that set forth in
the Prospectus and should be read in conjunction with the Prospectus. This SAI
is incorporated by reference in its entirety into each Prospectus. Copies of a
Prospectus may be obtained by writing the Trust at 3435 Stelzer Road, Columbus,
Ohio 43219-3035, or by telephoning toll free (800) 257-5872.
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TABLE OF CONTENTS
Page
INVESTMENT OBJECTIVES AND POLICIES........................................... 1
Additional Information on the Allocated Funds' and
the Capital Manager Fund's Investment Policies...................... 1
Additional Information on Portfolio Instruments.......................... 2
INVESTMENT RESTRICTIONS.......................................................13
Portfolio Turnover.......................................................15
NET ASSET VALUE...............................................................15
Valuation of the Money Market Fund......................................15
Valuation of Other Funds................................................16
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.............................. 16
MANAGEMENT OF THE TRUST..................................................... 17
Trustees and Officers....................................................17
Investment Advisers......................................................20
Portfolio Transactions...................................................21
Glass-Steagall Act.......................................................22
Administrator............................................................22
Expenses.................................................................23
Distributor..............................................................23
Custodians, Transfer Agent and Fund Accounting Services..................24
Auditors.................................................................24
Legal Counsel............................................................25
ADDITIONAL INFORMATION........................................................25
Description of Shares....................................................25
Vote of a Majority of the Outstanding Shares............................ 25
Shareholder and Trustee Liability....................................... 26
Additional Tax Information.............................................. 26
Distributions................................................................ 27
Hedging Transactions............................................... .... 28
Other Taxes............................................................. 28
Performance Information................................................. 28
Miscellaneous........................................................... 30
FINANCIAL STATEMENTS......................................................... 30
APPENDIX................................................................. ... i
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The Trust is an open-end management investment company which offers seven
separate diversified Funds, each with different investment objectives. This SAI
contains information about the following five Funds which, along with the
"Underlying Qualivest Funds" described below, are advised by Qualivest Capital
Management, Inc. ("Qualivest"): the Variable Insurance Allocated Conservative
Fund (the "Conservative Fund"), the Variable Insurance Allocated Balanced Fund
(the "Balanced Fund"), the Variable Insurance Allocated Growth Fund (the "Growth
Fund"), the Variable Insurance Allocated Aggressive Fund (the "Aggressive Fund")
(collectively, the "Allocated Funds"), and Variable Insurance Money Market Fund
(the "Money Market Fund"). This SAI also contains information about the
following two Funds which, along with the "Underlying BB&T Funds" described
below, are advised by Branch Banking and Trust Company ("BB&T"): the BB&T Growth
and Income Fund (the "Growth and Income Fund") and the BB&T Capital Manager Fund
(the "Capital Manager Fund").
Much of the information contained in this SAI expands upon subjects discussed in
the Prospectuses of the seven Funds described above. Capitalized terms not
defined herein are defined in such Prospectuses. No investment in Shares of a
Fund should be made without first reading the Fund's Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
Additional Information on the Allocated Funds' and the Capital Manager Fund's
Investment Policies
Each Allocated Fund seeks its investment objective by investing in a diversified
portfolio of one or more of the following funds (the "Underlying Qualivest
Funds"), all of which are series of Qualivest Funds, an affiliated open-end
management investment company: the Qualivest Large Companies Value Fund (the
"Qualivest Large Companies Fund"), the Qualivest Small Companies Value Fund (the
"Qualivest Small Companies Fund"), the Qualivest International Opportunities
Fund (the "Qualivest International Fund"), and the Qualivest Optimized Stock
Fund (the "Qualivest Optimized Fund") (collectively, the "Qualivest Equity
Funds"); the Qualivest Intermediate Bond Fund and the Qualivest Diversified Bond
Fund (the "Qualivest Bond Fund") (collectively, the "Qualivest Income Funds");
and the Qualivest U.S. Treasury Money Market Fund (the "Qualivest U.S. Treasury
Fund") and the Qualivest Money Market Fund (collectively, the "Qualivest Money
Funds"). Accordingly, the investment performance of each Allocated Fund is
directly related to the performance of the Underlying Qualivest Funds, which may
engage in the investment techniques described below. The Capital Manager Fund
seeks its investment objective by investing in a diversified portfolio of one or
more of the following funds (the "Underlying BB&T Funds" and collectively with
the Underlying Qualivest Funds, the "Underlying Funds") all of which are series
of The BB&T Mutual Funds Group, another affiliated open-end management
investment company: the BB&T Growth and Income Stock Fund (the "BB&T Growth and
Income Fund"), the BB&T Balanced Fund, the BB&T Small Company Growth Fund, the
BB&T International Equity Fund, the BB&T Short-Intermediate U.S. Government
Income Fund (the "BB&T Short-Intermediate Fund"), the BB&T Intermediate U.S.
Government Bond Fund (the "BB&T Intermediate Bond Fund"), and the BB&T U.S.
Treasury Money Market Fund (the "BB&T U.S. Treasury Fund"). Accordingly, the
investment performance of the Capital Manager Fund is directly related to the
performance of the Underlying BB&T Funds, which may engage in the investment
techniques described below. In addition to shares of the Underlying Funds, for
temporary cash management purposes, each Allocated Fund and the Capital Manager
Fund may invest in short-term obligations (with maturities of 12 months or less)
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consisting of commercial paper (including variable amount master demand notes)
and obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. These investments are described below under "Additional
Information on Portfolio Instruments."
Additional Information on Portfolio Instruments
The following policies supplement the investment objectives and policies of the
Money Market Fund and the Underlying Funds as set forth in the Prospectus.
General. The Money Market Fund, Qualivest Equity Funds, Qualivest Income Funds
and Qualivest Money Funds will not acquire portfolio securities issued by, make
savings deposits in, or enter into repurchase, reverse repurchase, or dollar
roll agreements with affiliates of the Qualivest Funds, except that the
Qualivest Optimized Fund may invest in such securities if they are included in
the S&P 500 Index.
Bank Obligations. The Money Market Fund, the Stock and Income Fund, and the
Underlying Funds may invest in bank obligations consisting of bankers'
acceptances, certificates of deposit, and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange typically drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Bankers' acceptances invested in by
the Funds and the Underlying Funds will be those guaranteed by domestic and
foreign banks having, at the time of investment, capital, surplus, and undivided
profits in excess of $100,000,000 (as of the date of their most recently
published financial statements).
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or a savings and loan association for a definite
period of time and earning a specified return. Certificates of deposit and time
deposits will be those of domestic and foreign banks and savings and loan
associations, if (a) at the time of investment the depository institution has
capital, surplus, and undivided profits in excess of $100,000,000 (as of the
date of its most recently published financial statements), or (b) the principal
amount of the instrument is insured in full by the Federal Deposit Insurance
Corporation.
The Money Market Fund and the Underlying Qualivest Funds may also invest in
Eurodollar Certificates of Deposit, which are U.S. dollar denominated
certificates of deposit issued by offices of foreign and domestic banks located
outside the United States; Yankee Certificates of Deposit, which are
certificates of deposit issued by a U.S. branch of a foreign bank denominated in
U.S. dollars and held in the United States; Eurodollar Time Deposits ("ETDs"),
which are U.S. dollar denominated deposits in a foreign branch of a U.S. bank or
a foreign bank; and Canadian Time Deposits, which are basically the same as ETDs
except they are issued by Canadian offices of major Canadian banks.
Commercial Paper. Commercial paper consists of unsecured promissory notes issued
by corporations. Except as noted below with respect to variable amount master
demand notes, issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
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Variable Amount Master Demand Notes. Variable amount master demand notes, in
which the Funds and the Underlying Funds (except for the BB&T U.S. Treasury
Fund) may invest, are unsecured demand notes that permit the indebtedness
thereunder to vary and provide for periodic adjustments in the interest rate
according to the terms of the instrument. Because master demand notes are direct
lending arrangements between a Fund or Underlying Fund and the issuer, they are
not normally traded. Although there is no secondary market in the notes, a Fund
or Underlying Fund may demand payment of principal and accrued interest at any
time. While the notes are not typically rated by credit rating agencies, issuers
of variable amount master demand notes (which are normally manufacturing,
retail, financial, and other business concerns) must satisfy the same criteria
as set forth above for commercial paper. Qualivest, BB&T, and any sub-adviser
each will consider the earning power, cash flow, and other liquidity ratios of
the issuers of such notes and will continuously monitor their financial status
and ability to meet payment on demand. In determining dollar weighted average
portfolio maturity, a variable amount master demand note will be deemed to have
a maturity equal to the longer of the period of time remaining until the next
interest rate adjustment or the period of time remaining until the principal
amount can be recovered from the issuer through demand.
Foreign Investments. Investment in foreign securities is subject to special
investment risks that differ in some respects from those related to investments
in securities of U.S. domestic issuers.
Because foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies, there may be less publicly available information
about a foreign company than about a U.S. company. Volume and liquidity in most
foreign bond markets are less than in the U.S., and securities of many foreign
companies are less liquid and more volatile than securities of comparable U.S.
companies. Fixed commissions on foreign securities exchanges are generally
higher than negotiated commissions on U.S. exchanges, although a Fund or an
Underlying Fund will endeavor to achieve the most favorable net results on
portfolio transactions. There is generally less government supervision and
regulation of securities exchanges, brokers, dealers and listed companies than
in the U.S., thus increasing the risk of delayed settlements of portfolio
transactions or loss of certificates for portfolio securities.
Foreign markets also have different clearance and settlement procedures, and in
certain markets, there have been times when settlements have been unable to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. Such delays in settlement could result in temporary periods
when a portion of the assets of a Fund or Underlying Fund investing in foreign
markets is uninvested and no return is earned thereon. The inability of such a
Fund or Underlying Fund to make intended security purchases due to settlement
problems could cause the Fund or Underlying Fund to miss attractive investment
opportunities. Losses to a Fund or Underlying Fund due to subsequent declines in
the value of portfolio securities, or losses arising out of an inability to
fulfill a contract to sell such securities, could result in potential liability
to the Fund or Underlying Fund. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
the investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
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
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securities of U.S. corporations and are certainly less liquid than securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. Finally, in the event of a default of any such foreign debt
obligations, it may be more difficult to obtain or to enforce a judgment against
the issuers of such securities.
A change in the value of any foreign currency against the U.S. dollar will
result in a corresponding change in the U.S. dollar value of securities
denominated in that currency. Such changes will also affect the income and
distributions to Shareholders of a Fund or an Underlying Fund investing in
foreign markets. In addition, although a Fund or Underlying Fund will receive
income on foreign securities in such currencies, it will be required to compute
and distribute income in U.S. dollars. Therefore, if the exchange rate for any
such currency declines materially after income has been accrued and translated
into U.S. dollars, a Fund or Underlying Fund could be required to liquidate
portfolio securities to make required distributions. Similarly, if an exchange
rate declines between the time a Fund or Underlying Fund incurs expenses in U.S.
dollars and the time such expenses are paid, the amount of such currency
required to be converted into U.S. dollars in order to pay such expenses in U.S.
dollars will be greater.
In general, there is a large, liquid market in the United States for many
American Depositary Receipts ("ADRs"). The information available for ADRs is
subject to the accounting, auditing and financial reporting standards of the
domestic market or exchange on which they are traded, which standards are more
uniform and more exacting than those to which many foreign issuers may be
subject. Certain 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 depositary of
an unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the deposited securities
or to pass through the voting rights to facility holders with respect to the
deposited securities, whereas the depositary of a sponsored facility typically
distributes shareholder communications and passes through the voting rights.
Variable and Floating Rate Notes. The Money Market Fund and the Qualivest Money
Funds may acquire variable and floating rate notes, subject to the investment
objective, policies and restrictions applicable to each. A variable rate note is
one whose terms provide for the adjustment of its interest rate on set dates and
which, upon such adjustment, can reasonably be expected to have a market value
that approximates its par value. A floating rate note is one whose terms provide
for the adjustment of its interest rate whenever a specified interest rate
changes and which, at any time, can reasonably be expected to have a market
value that approximates its par value. Such notes are frequently not rated by
credit rating agencies; however, unrated variable and floating rate notes will
be determined by Qualivest, under guidelines established by the Board of
Trustees of the Trust or Qualivest Funds, as appropriate, to be of comparable
quality at the time of purchase to rated instruments eligible for purchase under
the Money Market Fund's investment policies. In making such determinations, the
investment adviser will consider the earning power, cash flow and other
liquidity ratios of the issuers of such notes (such issuers include financial,
merchandising, bank holding and other companies) and will continuously monitor
their financial condition. Although there may be no active secondary market with
respect to a particular variable or floating rate note purchased by the Money
Market Fund or Underlying Fund, it may resell the note at any time to a third
party. The absence of an active secondary market, however, could make it
difficult for the Money Market Fund or Underlying Fund to dispose of a variable
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or floating rate note in the event the issuer of the note defaulted on its
payment obligations and the Money Market Fund or Underlying Fund could, as a
result or for other reasons, suffer a loss to the extent of the default. To the
extent that the Money Market Fund or Underlying Fund is not entitled to receive
the principal amount of a note within seven days, such note will be treated as
an illiquid security for purposes of calculation of the limitation on investment
in illiquid securities as set forth in the Fund or Underlying Fund's investment
restrictions. Variable or floating rate notes may be secured by bank letters of
credit.
Variable or floating rate notes invested in by the Money Market Fund or the
Qualivest Money Funds may have maturities of more than 397 days, as follows:
1. An instrument that is issued or guaranteed by the U.S. Government or any
agency thereof which has a variable rate of interest readjusted no less
frequently than every 397 days will be deemed to have a maturity equal to the
period remaining until the next readjustment of the interest rate.
2. A variable rate note, the principal amount of which is scheduled on the face
of the instrument to be paid in 397 days or less, will be deemed to have a
maturity equal to the period remaining until the next readjustment of the
interest rate.
3. A variable rate note that is subject to a demand feature will be deemed to
have a maturity equal to the longer of the period remaining until the next
readjustment of the interest rate or the period remaining until the principal
amount can be recovered through demand.
4. A floating rate note that is subject to a demand feature will be deemed to
have a maturity equal to the period remaining until the principal amount can be
recovered through demand.
As used above, a note is "subject to a demand feature" where the Money Market
Fund or an Underlying Fund is entitled to receive the principal amount of the
note either at any time on no more than 30 days' notice or at specified
intervals not exceeding 397 days.
Money Market Funds. Each of the Growth and Income Fund, the Qualivest Equity
Funds, the Qualivest Income Funds, and the Underlying BB&T Funds (except for the
BB&T U.S. Treasury Fund) may invest up to 5% of the value of its total assets in
the securities of any one money market fund (including shares of certain
affiliated money market funds pursuant to an order from the Securities and
Exchange Commission), provided that no more than 10% of such Fund's total assets
may be invested in the securities of money market funds in the aggregate. The
Money Market Fund and each of the Qualivest Money Funds may invest up to 25% of
its total assets in the securities of money market funds.
In order to avoid the imposition of additional fees as a result of investments
by the Growth and Income Fund, the Qualivest Equity Funds, the Qualivest Income
Funds, and the Underlying BB&T Funds (except for the BB&T U.S. Treasury Fund) in
shares of affiliated money market funds, Qualivest, BB&T, BISYS Fund Services
("BISYS" or "Distributor" or "Administrator"), and their affiliates will not
retain any portion of their usual service fees from the Funds that are
attributable to investments in shares of the affiliated money market funds. No
sales charges, contingent deferred sales charges, 12b-1 fees, or other
underwriting or distribution fees will be incurred in connection with their
investments in the affiliated money market funds. These Funds will vote their
shares of each of the affiliated money market funds in proportion to the vote by
all other shareholders of such fund.
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Moreover, no single Fund or Underlying Fund may own more than 3% of the
outstanding shares of a single affiliated money market fund.
U.S. Government Obligations. The BB&T U.S. Treasury Fund may invest in U.S.
Government securities to the extent that they are obligations issued or
guaranteed by the U.S. Treasury. The Money Market Fund, the Growth and Income
Fund, and each of the other Underlying Funds may invest in obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities, including
bills, notes and bonds issued by the U.S. Treasury, as well as "stripped" U.S.
Treasury obligations such as Treasury Receipts issued by the U.S. Treasury
representing either future interest or principal payments. Stripped securities
are issued at a discount to their "face value," and may exhibit greater price
volatility than ordinary debt securities because of the manner in which their
principal and interest are returned to investors. The stripped Treasury
obligations in which the Funds and Underlying Funds may invest do not include
Certificates of Accrual on Treasury Securities ("CATS") or Treasury Income
Growth Receipts ("TIGRs").
Obligations of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the Treasury; others are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; and still others are supported only by the
creditworthiness of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law. Each Fund or
Underlying Fund will invest in the obligations of such agencies or
instrumentalities only when Qualivest, BB&T, or a sub-adviser believes that the
credit risk with respect thereto is minimal.
Options Trading. The Growth and Income Fund, the Qualivest Equity Funds, the
Qualivest Income Funds, the BB&T Small Company Growth Fund, and the BB&T
International Equity Fund may purchase put and call options. A call option gives
the purchaser the right to buy, and a writer has the obligation to sell, the
underlying security or foreign currency at the stated exercise price at any time
prior to the expiration of the option, regardless of the market price or
exchange rate of the security or foreign currency, as the case may be. The
premium paid to the writer is consideration for undertaking the obligations
under the option contract. A put option gives the purchaser the right to sell
the underlying security or foreign currency at the stated exercise price at any
time prior to the expiration date of the option, regardless of the market price
or exchange rate of the security or foreign currency, as the case may be. Put
and call options will be valued at the last sale price, or in the absence of
such a price, at the mean between bid and asked price.
When a Fund or Underlying Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by the Fund or Underlying
Fund is included in the liability section of its statement of assets and
liabilities as a deferred credit. The amount of the deferred credit will be
subsequently marked-to-market to reflect the current value of the option
written. The current value of the traded option is the last sale price or, in
the absence of a sale, the average of the closing bid and asked prices. If an
option expires on the stipulated expiration date, or if a Fund or Underlying
Fund enters into a closing purchase transaction, it will realize a gain (or a
loss if the cost of a closing purchase transaction exceeds the net premium
received when the option is sold) and the deferred credit related to such option
will be eliminated. If an option is exercised, the Fund or Underlying Fund may
deliver the underlying security in the open market. In either event, the
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proceeds of the sale will be increased by the net premium originally received
and the Fund or Underlying Fund will realize a gain or loss.
The Qualivest Equity Funds, the Qualivest Income Funds, and the BB&T
International Equity Fund also may purchase or sell index options. Index options
(or options on securities indices) are similar in many respects to options on
securities except that an index option gives the holder the right to receive,
upon exercise, cash instead of securities, if the closing level of the
securities index upon which the option is based is greater than, in the case of
a call, or less than, in the case of a put, the exercise price of the option.
When-Issued and Delayed-Delivery Securities. The Money Market Fund, the Growth
and Income Fund, and the Underlying Funds (except the BB&T U.S. Treasury Fund)
may purchase securities on a "when-issued" or "delayed-delivery" basis (i.e.,
for delivery beyond the normal settlement date at a stated price and yield).
When a Fund or Underlying Fund agrees to purchase securities on a "when-issued"
or "delayed-delivery" basis, its custodian will set aside cash or liquid
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside securities to satisfy the purchase
commitment, and in such a case, the Fund or Underlying Fund may be required
subsequently to place additional assets in the separate account in order to
assure that the value of the account remains equal to the amount of its
commitment. It may be expected that a Fund or Underlying Fund investing in
securities on a when-issued or delayed delivery basis, net assets will fluctuate
to a greater degree when it sets aside securities to cover such purchase
commitments than when it sets aside cash. In addition, because the Fund or
Underlying Fund will set aside cash or liquid securities to satisfy its purchase
commitments in the manner described above, its liquidity and the ability of its
investment adviser to manage it might be affected in the event its commitments
to purchase "when-issued" or "delayed-delivery" securities ever exceeded 25% of
the value of its assets. Under normal market conditions, however, the Fund or
Underlying Fund's commitment to purchase "when-issued" or "delayed-delivery"
securities will not exceed 25% of the value of each Fund or Underlying Fund's
total assets.
When a Fund or Underlying Fund engages in "when-issued" or "delayed-delivery"
transactions, it relies on the seller to consummate the trade. Failure of the
seller to do so may result in the Fund or Underlying Fund incurring a loss or
missing the opportunity to obtain a price considered to be advantageous.
Mortgage-Related Securities. The Money Market Fund, the Growth and Income Fund,
the Underlying Qualivest Funds (except the Qualivest Optimized Fund and the
Qualivest International Fund), the BB&T Short-Intermediate Fund, the BB&T
Intermediate Bond Fund, the BB&T Balanced Fund, and the BB&T Small Company
Growth Fund each may consistent with its investment objective and policies,
invest in mortgage-related securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities. In addition, each may invest in
mortgage-related securities issued by nongovernmental entities, provided,
however, that to the extent the Fund or Underlying Fund purchases
mortgage-related securities from such issuers which may, solely for purposes of
the Investment Company Act of 1940, as amended ("1940 Act"), be deemed to be
investment companies, the Fund or Underlying Fund's investment in such
securities will be subject to the limitations on its investment in investment
company securities.
Mortgage-related securities, for purposes of the Funds' Prospectus and this SAI,
represent pools of mortgage loans assembled for sale to investors by various
governmental agencies such as the Government National Mortgage Association
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("GNMA") and government-related organizations such as the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"), as well as by nongovernmental issuers such as commercial banks,
savings and loan institutions, mortgage bankers and private mortgage insurance
companies. Although certain mortgage-related securities are guaranteed by a
third party or otherwise similarly secured, the market value of the security,
which may fluctuate, is not so secured. If a Fund or Underlying Fund purchases a
mortgage-related security at a premium, that portion may be lost if there is a
decline in the market value of the security whether resulting from changes in
interest rates or prepayments in the underlying mortgage collateral. As with
other interest-bearing securities, the prices of such securities are inversely
affected by changes in interest rates. However, though the value of a
mortgage-related security may decline when interest rates rise, the converse is
not necessarily true, since in periods of declining interest rates the mortgages
underlying the securities are prone to prepayment, thereby shortening the
average life of the security and shortening the period of time over which income
at the higher rate is received. When interest rates are rising, though, the rate
of prepayment tends to decrease, thereby lengthening the period of time over
which income at the lower rate is received. For these and other reasons, a
mortgage-related security's average maturity may be shortened or lengthened as a
result of interest rate fluctuations and, therefore, it is not possible to
predict accurately the security's return. In addition, regular payments received
in respect of mortgage-related securities include both interest and principal.
No assurance can be given as to the return the Funds or Underlying Funds will
receive when these amounts are reinvested.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage related securities
and among the securities that they issue. Mortgage-related securities issued by
GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee. Mortgage-related securities issued by FNMA include FNMA
Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of FNMA and are not backed by or entitled to
the full faith and credit of the United States. FNMA is a government-sponsored
organization owned entirely by private stockholders. Fannie Maes are guaranteed
as to the timely payment of the principal and interest by FNMA. Mortgage-related
securities issued by FHLMC include FHLMC Mortgage Participation Certificates
(also known as "Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality of
the United States, created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Banks and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. Freddie Macs
entitle the holder to the timely payment of interest, which is guaranteed by
FHLMC. FHLMC guarantees either ultimate collection or the timely payment of all
principal payments on the underlying mortgage loans. When FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.
Restricted Securities. "Section 4(2) securities" are securities which are issued
in reliance on the "private placement" exemption from registration which is
afforded by Section 4(2) of the Securities Act of 1933 (the "1933 Act"). The
Money Market Fund, the BB&T U.S.
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Treasury Fund, and each Qualivest Money Fund will not purchase Section 4(2)
securities which have not been determined to be liquid in excess of 10% of its
net assets. The Growth and Income Fund, the Underlying BB&T Funds other than the
BB&T U.S. Treasury Fund, and each Qualivest Equity Fund and Qualivest Income
Fund will not purchase section 4(2) securities which have not been determined to
be liquid in excess of 15% of its net assets. Qualivest, BB&T, and each
sub-adviser to an Underlying BB&T Fund has been delegated the day-to-day
authority to determine whether a particular issue of Section 4(2) securities
that are eligible for resale under Rule 144A under the 1933 Act should be
treated as liquid. Rule 144A provides a safe-harbor exemption from the
registration requirements of the 1933 Act for resales to "qualified
institutional buyers" as defined in Rule 144A. With the exception of registered
broker-dealers, a qualified institutional buyer must generally own and invest on
a discretionary basis at least $100 million in securities.
Qualivest, BB&T, or a sub-adviser may deem Section 4(2) securities liquid if it
believes that, based on the trading markets for such security, such security can
be disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund or Underlying Fund has valued the
security. In making such determination, the following factors, among others, may
be deemed relevant: (i) the credit quality of the issuer; (ii) the frequency of
trades and quotes for the security; (iii) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers; (iv)
dealer undertakings to make a market in the security; and (v) the nature of the
security and the nature of market-place trades.
Treatment of Section 4(2) securities as liquid could have the effect of
decreasing the level of a Fund's or Underlying Fund's liquidity to the extent
that qualified institutional buyers become, for a time, uninterested in
purchasing these securities.
Medium-Grade Debt Securities. The Qualivest Large Companies Fund, the Qualivest
Small Companies Fund, and each of the Qualivest Income Funds may invest in debt
securities which are within the fourth highest rating group assigned by an NRSRO
(e.g., including securities rated BBB by Standard & Poor's Corporation ("S&P")
or Baa by Moody's Investors Service, Inc. ("Moody's")) or, if not rated, or are
of comparable quality as determined by Qualivest ("Medium-Grade Securities").
As with other fixed-income securities, Medium-Grade Securities are subject to
credit risk and market risk. Market risk relates to changes in a security's
value as a result of changes in interest rates. Credit risk relates to the
ability of the issuer to make payments of principal and interest. Medium-Grade
Securities are considered by Moody's to have speculative characteristics.
Medium-Grade Securities are generally subject to greater credit risk than
comparable higher-rated securities because issuers are more vulnerable to
economic downturns, higher interest rates or adverse issuer-specific
developments. In addition, the prices of Medium-Grade Securities are generally
subject to greater market risk and therefore react more sharply to changes in
interest rates. The value and liquidity of Medium-Grade Securities may be
diminished by adverse publicity and investor perceptions.
Because certain Medium-Grade Securities are traded only in markets where the
number of potential purchasers and sellers, if any, is limited, the ability of
those Underlying Qualivest Funds to sell such securities at their fair market
value either to meet redemption requests or to respond to changes in the
financial markets may be limited.
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Particular types of Medium-Grade Securities may present special concerns. The
prices of payment-in-kind or zero-coupon securities may react more strongly to
changes in interest rates than the prices of other Medium-Grade Securities. Some
Medium-Grade Securities in which such Underlying Qualivest Funds may invest may
be subject to redemption or call provisions that may limit increases in market
value that might otherwise result from lower interest rates while increasing the
risk that those Underlying Qualivest Funds may be required to reinvest
redemption or call proceeds during a period of relatively low interest rates.
The credit ratings issued by nationally recognized statistical rating
organizations ("NRSROs") are subject to various limitations. For example, while
such ratings evaluate credit risk, they ordinarily do not evaluate the market
risk of Medium-Grade Securities. In certain circumstances, the ratings may not
reflect in a timely fashion adverse developments affecting an issuer. For these
reasons, Qualivest conducts its own independent credit analysis of Medium-Grade
Securities.
Guaranteed Investment Contracts. When investing in Guaranteed Investment
Contracts ("GICs"), the Money Market Fund and each of the Qualivest Income Funds
and the Qualivest Money Funds make cash contributions to a deposit fund of an
insurance company's general account. The insurance company then credits to the
deposit fund on a monthly basis guaranteed interest. The GICs provide that this
guaranteed interest will not be less than a certain minimum rate. The insurance
company may assess periodic charges against a GIC for expense and service costs
allocable to it, and the charges will be deducted from the value of the deposit
fund. The Qualivest Income Funds may invest in GICs without regard to the
ratings, if any, assigned to the issuing insurance companies' outstanding debt
securities. The Money Market Fund and Qualivest Money Funds may invest in GICs
issued by insurance companies whose outstanding debt securities are rated in the
first two rating categories by an NRSRO or, if not rated, that Qualivest deems
to be of comparable quality. Because the principal amount of a GIC may not be
received from the insurance company on seven days' notice or less, the GIC is
considered an illiquid investment, and, together with other instruments which
are deemed to be illiquid, will not exceed the Money Market Fund's or an
Underlying Qualivest Fund's restriction on investment in illiquid securities. In
determining average weighted portfolio maturity, GICs will be deemed to have a
maturity equal to the period of time remaining until the next readjustment of
the guaranteed interest rate.
Repurchase Agreements. Securities held by the Money Market Fund, the Growth and
Income Fund, and the Underlying Funds (except the Qualivest U.S. Treasury Fund)
may be subject to repurchase agreements. Under the terms of a repurchase
agreement, a Fund or Underlying Fund would acquire securities from member banks
of the Federal Deposit Insurance Corporation and registered broker-dealers that
Qualivest deems creditworthy under guidelines approved by the Board of Trustees,
subject to the seller's agreement to repurchase such securities at a mutually
agreed-upon date and price. If the seller were to default on its repurchase
obligation or become insolvent, a Fund or Underlying Fund holding such
obligation would suffer a loss to the extent that the proceeds from a sale of
the underlying portfolio securities were less than the repurchase price under
the agreement. Securities subject to repurchase agreements will be held by the
relevant Fund's or Underlying Fund's custodian or another qualified custodian,
as appropriate, or in the Federal Reserve/Treasury book-entry system.
Futures Contracts. The Growth and Income Fund, the Qualivest Equity Funds, the
Qualivest Income Funds, the BB&T Small Company Growth Fund, and the BB&T
International Equity Fund may enter into futures contracts. This investment
technique is designed primarily to hedge against anticipated future changes in
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market conditions or foreign exchange rates which otherwise might adversely
affect the value of securities which a Fund or Underlying Fund holds or intends
to purchase. For example, when interest rates are expected to rise or market
values of portfolio securities are expected to fall, a Fund or an Underlying
Fund can seek through the sale of futures contracts to offset a decline in the
value of its portfolio securities. When interest rates are expected to fall or
market values are expected to rise, a Fund or Underlying Fund, through the
purchase of such contracts, can attempt to secure better rates or prices than
might later be available in the market when it effects anticipated purchases.
The acquisition of put and call options on futures contracts will, respectively,
give a Fund or an Underlying Fund the right (but not the obligation), for an
specified price, to sell or to purchase the underlying futures contract, upon
exercise of the option, at any time during the option period.
Futures transactions involve brokerage costs and require a Fund or an Underlying
Fund to segregate liquid assets, such as cash, U.S. Government securities or
other liquid securities to cover its obligation under such contracts. A Fund or
an Underlying Fund may lose the expected benefit of futures transactions if
interest rates, securities prices or foreign exchange rates move in an
unanticipated manner. Such unanticipated changes may also result in poorer
overall performance than if the Fund had not entered into any futures
transactions. In addition, the value of a Fund's futures positions may not prove
to be perfectly or even highly correlated with the value of its portfolio
securities and foreign currencies, limiting the Fund's ability to hedge
effectively against interest rate, foreign exchange rate and/or market risk and
giving rise to additional risks. There is no assurance of liquidity in the
secondary market for purposes of closing out futures positions.
Forward Foreign Currency Exchange Contracts. The Qualivest Equity Funds (other
than the Qualivest Optimized Fund) and the BB&T International Equity Fund may
engage in foreign currency exchange transactions. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days ("Term") from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded directly between currency traders (usually
large commercial banks) and their customers.
No Underlying Fund intends to enter into such forward contracts if it would have
more than 10% of the value of its total assets committed to such contracts on a
regular or continuous basis. An Underlying Fund also will not enter into such
forward contracts or maintain a net exposure in such contracts where it would be
obligated to deliver an amount of foreign currency in excess of the value of
such Underlying Fund's securities or other assets denominated in that currency.
An Underlying Fund's custodian bank segregates cash or liquid securities in an
amount not less than the value of the Underlying Fund's total assets committed
to forward foreign currency exchange contracts entered into for the purchase of
a foreign security. If the value of the securities segregated declines,
additional cash or securities are added so that the segregated amount is not
less than the amount of such Underlying Fund's commitments with respect to such
contracts. The Underlying Funds generally do not enter into a forward contract
with a Term longer than one year.
Foreign Currency Options. A foreign currency option provides the Growth and
Income Fund, Qualivest Large Companies Fund, Qualivest Small Companies Fund,
Qualivest International Fund, BB&T Small Company Growth Fund, or BB&T
International Equity Fund, as the option buyer, with the right to buy or sell a
stated amount of foreign currency at the exercise price at a specified date
11
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or during the option period. A call option gives its owner the right, but not
the obligation, to buy the currency, while a put option gives its owner the
right, but not the obligation, to sell the currency. The option seller (writer)
is obligated to fulfill the terms of the option sold if it is exercised.
However, either seller or buyer may close its position during the option period
in the secondary market for such options any time prior to expiration.
A call rises in value if the underlying currency appreciates. Conversely, a put
rises in value if the underlying currency depreciates. While purchasing a
foreign currency option can protect a Fund or Underlying Fund against an adverse
movement in the value of a foreign currency, it does not limit the gain which
might result from a favorable movement in the value of such currency. For
example, if a Fund or Underlying Fund were holding securities denominated in an
appreciating foreign currency and had purchased a foreign currency put to hedge
against a decline in the value of the currency, it would not have to exercise
its put. Similarly, if a Fund or Underlying Fund has entered into a contract to
purchase a security denominated in a foreign currency and had purchased a
foreign currency call to hedge against a rise in the value of the currency but
instead the currency had depreciated in value between the date of purchase and
the settlement date, such Fund or Underlying Fund would not have to exercise its
call but could acquire in the spot market the amount of foreign currency needed
for settlement.
Foreign Currency Futures Transactions. As part of its financial futures
transactions, the Growth and Income Fund, each Qualivest Equity Fund (except the
Qualivest Optimized Fund), the BB&T Small Company Growth Fund, and the BB&T
International Equity Fund may use foreign currency futures contracts and options
on such futures contracts. Through the purchase or sale of such contracts, a
Fund or Underlying Fund may be able to achieve many of the same objectives as
through forward foreign currency exchange contracts more effectively and
possibly at a lower cost.
Unlike forward foreign currency exchange contracts, foreign currency futures
contracts and options on foreign currency futures contracts are standardized as
to amount and delivery period and may be traded on boards of trade and
commodities exchanges or directly with a dealer which makes a market in such
contracts and options. It is anticipated that such contracts may provide greater
liquidity and lower cost than forward foreign currency exchange contracts.
Regulatory Restrictions. As required by the Securities and Exchange Commission,
when purchasing or selling a futures contract or writing a put or call option or
entering into a forward foreign currency exchange purchase, a Fund or an
Underlying Fund will maintain in a segregated account cash or liquid securities
equal to the value of such contracts.
To the extent required to comply with Commodity Futures Trading Commission
Regulation 4.5 and thereby avoid being classified as a "commodity pool
operator," a Fund or an Underlying Fund will not enter into a futures contract
or purchase an option thereon if immediately thereafter the initial margin
deposits for futures contracts held by such Fund plus premiums paid by it for
open options on futures would exceed 5% of such Fund's total assets. Such Fund
or Underlying Fund will not engage in transactions in financial futures
contracts or options thereon for speculation, but only to attempt to hedge
against changes in market conditions affecting the values of securities which
such Fund holds or intends to purchase. When futures contracts or options
thereon are purchased to protect against a price increase on securities intended
to be purchased later, it is anticipated that at least 25% of such intended
purchases will be completed. When other futures contracts or options thereon are
purchased, the underlying value of such contracts will at all times not exceed
the sum of:
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(1) accrued profit on such contracts held by the broker; (2) cash or high
quality money market instruments set aside in an identifiable manner; and (3)
cash proceeds from investments due in 30 days.
INVESTMENT RESTRICTIONS
Each Fund's investment objective is fundamental and may not be changed without a
vote of the holders of a majority of the Fund's outstanding Shares. In addition,
the following investment restrictions may be changed with respect to a
particular Fund only by a vote of a majority of the outstanding Shares of that
Fund (as defined under "ADDITIONAL INFORMATION -- Vote of a Majority of the
Outstanding Shares" in this SAI).
None of the Funds will:
1. Purchase any securities which would cause more than 25% of the value of
the Fund's total assets at the time of purchase to be invested in securities of
one or more issuers conducting their principal business activities in the same
industry, provided that: (a) there is no limitation with respect to obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, domestic bank certificates of deposit or bankers' acceptances
issued by United States branches of domestic banks (for the Money Market Fund),
and repurchase agreements secured by obligations of the U.S. Government or its
agencies or instrumentalities; (b) wholly owned finance companies will be
considered to be in the industries of their parents if their activities are
primarily related to financing the activities of their parents; (c) an Allocated
Fund and the Capital Manager Fund may invest more than 25% of its total assets
in investment companies, or portfolios thereof, that are Underlying Funds of
such Fund; and (d) utilities will be divided according to their services. For
example, gas, gas transmission, electric and gas, electric and telephone will
each be considered a separate industry.
2. Purchase securities of any one issuer, other than obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities, if,
immediately after such purchase, more than 5% of the value of the Fund's total
assets would be invested in such issuer, or the Fund would hold more than 10% of
the outstanding voting securities of the issuer, except that 25% or less of the
value of a Fund's total assets may be invested without regard to such
limitations. There is no limit to the percentage of assets that may be invested
in U.S. Treasury bills, notes, or other obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities. In addition, there is no
limit to the percentage of assets that an Allocated Fund or the Capital Manager
Fund may invest in any investment company;
3. Borrow money or issue senior securities, except that a Fund may borrow
from banks or brokers, in amounts up to 10% of the value of its total assets at
the time of such borrowing. A Fund will not purchase securities while its
borrowings exceed 5% of its total assets;
4. Make loans, except that a Fund may purchase or hold debt instruments and
lend portfolio securities (in an amount not to exceed one-third of its total
assets), in accordance with its investment objective and policies, make time
deposits with financial institutions and enter into repurchase agreements;
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5. Underwrite the securities issued by other persons, except to the extent
that a Fund may be deemed to be an underwriter under certain securities laws in
the disposition of "restricted securities;"
6. Purchase or sell commodities or commodities contracts, except to the
extent disclosed in the current Prospectus of the Fund; and
7. Purchase or sell real estate (although investments in marketable
securities of companies engaged in such activities and securities secured by
real estate or interests therein, or in Underlying Funds investing in such
securities, are not prohibited by this restriction).
Irrespective of investment restriction number 2 above and pursuant to Rule 2a-7
under the 1940 Act, the Money Market Fund will, with respect to 100% of its
total assets, limit its investment in the securities of any one issuer in the
manner provided by such Rule.
The following additional investment restrictions are not fundamental policies
and therefore may be changed without the vote of a majority of the outstanding
Shares of a Fund. None of the Funds may:
1. Engage in any short sales (except for short sales "against the box");
2. Purchase securities of other investment companies, except (a) in
connection with a merger, consolidation, acquisition or reorganization, (b) to
the extent permitted by the 1940 Act or pursuant to any exemptions therefrom,
and (c) as consistent with the investment policies of an Allocated Fund or the
Capital Manager Fund;
3. Mortgage or hypothecate the Fund's assets in excess of one-third of the
Fund's total assets; and
4. Purchase or otherwise acquire any securities if, as a result, more than
15% (10% of the case of the Money Market Fund) of the Fund's net assets would be
invested in securities that are illiquid.
If any percentage restriction described above is satisfied at the time of
purchase, a later increase or decrease in such percentage resulting from a
change in net asset value will not constitute a violation of such restriction.
However, should a change in net asset value or other external events cause a
Fund's investments in illiquid securities to exceed the limitation set forth in
such Fund's Prospectus, that Fund will act to cause the aggregate amount of
illiquid securities to come within such limit as soon as reasonably practicable.
In such an event, however, that Fund would not be required to liquidate any
portfolio securities where the Fund would suffer a loss on the sale of such
securities.
Due to the investment policies of the Allocated Funds and the Capital Manager
Fund, each of these Funds will concentrate more than 25% of its total assets in
the investment company industry. However, no Underlying Fund in which such Funds
invest will concentrate more than 25% of its total assets in any one industry.
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Portfolio Turnover
Changes may be made in a Fund's portfolio consistent with the investment
objective and policies of the Fund whenever such changes are believed to be in
the best interests of the Fund and its Shareholders. The portfolio turnover
rates for all of the Funds may vary greatly from year to year as well as within
a particular year, and may be affected by cash requirements for redemptions of
Shares and by requirements which enable the Funds to receive certain favorable
tax treatments. High portfolio turnover rates will generally result in higher
transaction costs to a Fund, including brokerage commissions.
The portfolio turnover rate of each Allocated Fund and Capital Manager Fund is
expected to be low, as such Fund will purchase or sell shares of the Underlying
Qualivest Funds or Underlying BB&T Funds, respectively, to (i) accommodate
purchases and sales of such Fund's Shares, and (ii) change the percentage of its
assets invested in each Underlying Fund in which it invests in response to
market conditions. The Growth and Income Fund will be managed without regard to
its portfolio turnover rate. It is anticipated that the annual portfolio
turnover rate for an Underlying Fund normally will not exceed the amount stated
in such Fund's Prospectus.
The portfolio turnover rate for each of the Funds is calculated by dividing the
lesser of a Fund's purchases or sales of portfolio securities for the year by
the monthly average value of the securities. The Securities and Exchange
Commission requires that the calculation exclude all securities whose remaining
maturities at the time of acquisition are one year or less.
NET ASSET VALUE
The net asset value of each Fund is determined and the Shares of each Fund are
priced as of the Valuation Times on each Business Day of the Trust. A "Business
Day" is a day on which the New York Stock Exchange ("NYSE") is open for trading,
and any other day (other than a day on which there are insufficient changes in
the value of a Fund's portfolio securities to materially affect the Fund's net
asset value or days on which no Shares of the Fund are tendered for redemption
and no order to purchase any Shares is received). Currently, the NYSE is closed
on the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving, and Christmas.
Valuation of the Money Market Fund
The Money Market Fund has elected to use the amortized cost method of valuation
pursuant to Rule 2a-7 under the 1940 Act. This involves valuing an instrument at
its cost initially and thereafter assuming a constant amortization to maturity
of any discount or premium, regardless of the impact of fluctuating interest
rates on the market value of the instrument. This method may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price the Money Market Fund would receive if it sold the instrument. The value
of securities in this Fund can be expected to vary inversely with changes in
prevailing interest rates.
Pursuant to Rule 2a-7, the Money Market Fund will maintain a dollar-weighted
average maturity appropriate for its objective of maintaining a stable net asset
value per Share, provided that the Money Market Fund will not purchase any
security with a remaining maturity of more than 397 days (thirteen months)
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(securities subject to repurchase agreements may bear longer maturities) nor
maintain a dollar-weighted average maturity which exceeds 90 days. The Board of
Trustees has also undertaken to establish procedures reasonably designed, taking
into account current market conditions and the investment objective of this
Fund, to stabilize the net asset value per share of the Money Market Fund for
purposes of sales and redemptions at $1.00. These procedures include review by
the Trustees, at such intervals as they deem appropriate, to determine the
extent, if any, to which the net asset value per Share of the Fund calculated by
using available market quotations deviates from $1.00 per Share. In the event
such deviation exceeds one-half of one percent, Rule 2a-7 requires that the
Board of Trustees promptly consider what action, if any, should be initiated. If
the Trustees believe that the extent of any deviation from the Money Market
Fund's $1.00 amortized cost price per Share may result in material dilution or
other unfair results to new or existing investors, they will take such steps as
they consider appropriate to eliminate or reduce, to the extent reasonably
practicable, any such dilution or unfair results. These steps may include
selling portfolio instruments prior to maturity, shortening the dollar-weighted
average maturity, withholding or reducing dividends, reducing the number of the
Money Market Fund's outstanding Shares without monetary consideration, or
utilizing a net asset value per Share determined by using available market
quotations.
Valuation of Other Funds
Portfolio securities, the principal market for which is a securities exchange,
will be valued at the closing sales price on that exchange on the day of
computation, or, if there have been no sales during such day, at the latest bid
quotation. Portfolio securities, the principal market for which is not a
securities exchange, will be valued at their latest bid quotation in such
principal market. If no such bid price is available, then such securities will
be valued in good faith at their respective fair market values using methods
determined by or under the supervision of the Board of Trustees. Foreign
securities are valued based on quotations from the primary market in which they
are traded and are translated from the local currency into U.S. dollars using
current exchange rates. Portfolio securities with a remaining maturity of 60
days or less will be valued either at amortized cost or original cost plus
accrued interest, which approximates current value.
All other assets and securities, including securities for which market
quotations are not readily available, will be valued at their fair market value
as determined in good faith under the general supervision of the Board of
Trustees.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Shares of each Fund are sold on a continuous basis by the Distributor, and
the Distributor has agreed to use appropriate efforts to solicit all purchase
orders. 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
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practical for the Trust to determine the fair market value of its net assets.
Variable Contract Owners do not deal directly with the Funds to purchase,
redeem, or exchange Shares, and Variable Contract Owners should refer to the
prospectus for the applicable Separate Account for information on the allocation
of premiums and on transfers of accumulated value among sub-accounts of the
pertinent Separate Account that invests in the Funds.
Each Fund reserves the right to discontinue offering Shares at any time. In the
event that a Fund ceases offering its Shares, any investments allocated to the
Fund will, subject to any necessary regulatory approvals, be invested in another
portfolio of the Trust deemed appropriate by the Trustees.
MANAGEMENT OF THE TRUST
Trustees and Officers
Overall responsibility for management of the Trust rests with its Board of
Trustees, who are elected by the Shareholders of the Trust. The Trustees elect
the officers of the Trust to supervise actively its day-to-day operations.
The names of the Trustees, their addresses, ages, and principal occupations
during the past five years are set forth below:
Name, Address, and Age Principal Occupation During
Past 5 Years
James H. Woodward Chancellor, University of North Carolina at
University of North Carolina Charlotte.
at Charlotte
Charlotte, NC 28223
Age: 57
Michael Van Buskirk Chief Executive Officer, Ohio Bankers
37 West Broad Street Association (industry trade association).
Suite 1001
Columbus, OH 43215
Age: 50
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Walter B. Grimm* Employee of BISYS Fund Services 3435 Stelzer Road (6/92-
present); President, Columbus, OH 43219 Leigh Investments(investment firm)
(7/87-6/92).
Age: 50
* Mr. Grimm is an "interested person" of the Trust as that term is defined in
the 1940 Act.
The Trust pays each Trustee who is not an employee of BISYS or its affiliates a
retainer fee at the rate of $500 per calendar quarter, reasonable out-of-pocket
expenses, $500 for each regular meeting of the Board of Trustees attended in
person, and $250 for each regular meeting of the Board of Trustees attended by
telephone. The Trust also pays each such Trustee $500 for each special meeting
of the Board of Trustees attended in telephone, and $250 for each special
meeting of the Board of Trustees attended by telephone. For the fiscal year
ending December 31, 1997, the Trust anticipates paying the following
compensation to the Trustees of the Trust:
Aggregate Compensation Total Compensation from
Name from Trust* Trust and Fund Complex**
James H. Woodward $3,000 $ 3,000
Michael Van Buskirk $3,000 $ 3,000
Walter B. Grimm $0 $ 0
* The Trust does not accrue pension or retirement benefits as part of
Fund expenses, and Trustees of the Trust are not entitled to benefits
upon retirement from the Board of Trustees.
** The Fund Complex consists of the Trust, Qualivest Funds, the Tax-Free
Trust of Oregon, and The BB&T Mutual Funds Group.
The officers of the Trust, their addresses, ages, and principal occupations
during the past five years are as follows (unless otherwise indicated, the
address of each officer is 3435 Stelzer Road, Columbus, OH 43219):
Name and Address Position(s) Held Principal Occupation
With the Trust During Past 5 Years
Richard Ille President and Chief Employee of BISYS Fund
Age: 32 Executive Officer Services (7/90 - present).
Walter Grimm Vice President Employee of BISYS Fund
Age: 50 Services (6/92-present);
President, Leigh
Investments (investment
firm) (7/87-6/92).
Carl Juckett Vice President Employee of BISYS
Age: 42 Services (7/94 - present);
Manager, Broker/Dealer and
Investment Accounting
Systems, Huntington Bank
(1/89 - 7/94).
Frank Deutchki Vice President Employee of BISYS Fund
Age: 43 Services (4/96 - present);
Vice President, Audit
Director at Mutual Funds
Services Company, a
subsidiary of United States
Trust Company of New York
(2/89 - 3/96).
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Dana Gentile Vice President and Employee of BISYS Fund
Age: 34 Secretary Services (1987 - present).
Gregory Maddox Vice President and Employee of BISYS Fund
Columbia Square Assistant Secretary Services (4/91 - present).
Suite 500
1230 Columbia Street
San Diego, CA 92101
Age: 27
John Calvano Vice President and Employee of BISYS Fund
Age: 37 Assistant Secretary Services (10/94 - present);
Investment Representative,
BA Investment Services
(7/92 - 8/94); Marketing
Manager, Great Western
Investment Management
(10/86 - 7/94).
William Tomko Treasurer, Comptroller, Employee of BISYS Fund
Age: 38 and Principal Financial Services (4/87 - present).
and Accounting Officer
Alaina Metz Assistant Secretary Employee of BISYS Fund
Age: 29 Services (6/95 - present);
Supervisor, Mutual Fund
Legal Department, Alliance
Capital Management (5/89 -
6/95).
The officers of the Trust receive no compensation directly from the Trust for
performing the duties of their offices. BISYS receives fees from the Trust for
acting as Administrator. BISYS Fund Services Ohio, Inc. receives fees from the
Trust for providing certain fund accounting services.
As of June 1, 1997, the Trustees and officers of the Trust, as a group, owned
less than one percent of the Shares of any Fund of the Trust.
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Investment Advisers
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the Funds' investment objectives and restrictions, investment
advisory services are provided to the Allocated Funds and the Money Market Fund
by Qualivest, P.O. Box 2758, Portland, Oregon 97208, pursuant to an Investment
Advisory Agreement dated June 1, 1997 (the "Qualivest Investment Advisory
Agreement").
Qualivest is a wholly owned subsidiary of United States National Bank of Oregon,
which in turn is a wholly owned subsidiary of U.S. Bancorp, a publicly held bank
holding company.
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the Funds' investment objectives and restrictions, investment
advisory services are provided to the Growth and Income Fund and the Capital
Manager Fund by BB&T, 434 Fayetteville Street Mall, Raleigh, NC 27601, pursuant
to an Investment Advisory Agreement dated June 1, 1997 (the "BB&T Investment
Advisory Agreement").
BB&T is the oldest bank in North Carolina and is the principal bank affiliate of
Southern National Corporation ("SNC"), a bank holding company that is a North
Carolina corporation, headquartered in Winston-Salem, North Carolina.
Under the Investment Advisory Agreements, Qualivest and BB&T (the "Investment
Advisers") have agreed to provide, either directly or through one or more
sub-advisers, investment advisory services for each of the Funds as described in
the Prospectus. For the services provided and expenses assumed pursuant to the
Qualivest Investment Advisory Agreement, each of the following Funds pays
Qualivest a fee, computed daily and paid monthly, at the following annual rates
calculated as a percentage of the average daily net assets of such Fund: 0.35%
for the Money Market Fund; 0.05% for the Conservative Fund; 0.05% for the
Balanced Fund; 0.05% for the Growth Fund; and 0.05% for the Aggressive Fund. For
the services provided and expenses assumed pursuant to the BB&T Investment
Advisory Agreement, each of the following Funds pays BB&T a fee, computed daily
and paid monthly, at the following annual rates, calculated as a percentage of
the average daily net assets of such Fund: 0.74% for the Growth and Income Fund,
and 0.25% for the Capital Manager Fund.
Unless sooner terminated, each Investment Advisory Agreement continues in effect
as to a particular Fund for an initial term of two years, and thereafter for
successive one-year periods if such continuance is approved at least annually by
the Board of Trustees or by vote of a majority of the outstanding Shares of such
Fund and a majority of the Trustees who are not parties to the Investment
Advisory Agreement or interested persons (as defined in the 1940 Act) of any
party to the Investment Advisory Agreement by votes cast in person at a meeting
called for such purpose. Each Investment Advisory Agreement is terminable as to
a particular Fund at any time on 60 days' written notice without penalty by the
Trustees, by vote of a majority of the outstanding Shares of that Fund, or by
the Investment Adviser. Each Investment Advisory Agreement also terminates
automatically in the event of any assignment, as defined in the 1940 Act.
Each Investment Advisory Agreement provides that the Investment Adviser shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Trust in connection with the performance of its duties, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith, or gross negligence on the part of the Investment Adviser or any
sub-advisers in the performance of their duties, or from reckless disregard of
their duties and obligations thereunder.
From time to time, advertisements, supplemental sales literature, and
information furnished to present or prospective Shareholders of the Funds may
include descriptions of an Investment Adviser including, but not limited to, (i)
descriptions of the Investment Adviser's operations; (ii) descriptions of
certain personnel and their functions; and (iii) statistics and rankings related
to the Investment Adviser's operations.
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Portfolio Transactions
The Investment Advisers determine, subject to the general supervision of the
Board of Trustees and in accordance with each Fund's investment objective and
restrictions, which securities are to be purchased and sold by a Fund, and which
brokers or dealers are to be eligible to execute such Fund's portfolio
transactions.
Purchases and sales of portfolio securities which are debt securities usually
are principal transactions in which portfolio securities are normally purchased
directly from the issuer or from an underwriter or market maker for the
securities. Purchases from underwriters of portfolio securities generally
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers serving as market makers may include the spread between
the bid and asked price. Transactions on stock exchanges involve the payment of
negotiated brokerage commissions. Transactions in the over-the-counter market
are generally principal transactions with dealers. With respect to the
over-the--counter market, the Trust, where possible, will deal directly with
dealers who make a market in the securities involved except in those
circumstances where better price and execution are available elsewhere.
Allocation of transactions, including their frequency, to various brokers and
dealers is determined by each Investment Adviser in its best judgment and in a
manner deemed fair and reasonable to Shareholders. In selecting a broker, each
Investment Adviser evaluates a wide range of criteria, including the broker's
commission rate and execution capability, the broker's positioning and
distribution capabilities, back office efficiency, ability to handle difficult
trades, financial stability, reputation, prior performance, and research. The
primary consideration is the broker's ability to provide prompt execution of
orders in an effective manner at the most favorable price for the security.
Subject to this consideration, brokers and dealers who provide supplemental
investment research to an Investment Adviser may receive orders for transactions
on behalf of the Trust. Research may include brokers' analyses of specific
securities, performance and technical statistics, and information databases. It
may also include maintenance research, which is the information that keeps an
Investment Adviser informed concerning overall economic, market, political and
legal trends. Under some circumstances, an Investment Adviser's evaluation of
research and other broker selection criteria may result in one or a few brokers
executing a substantial percentage of a Fund's trades. This might occur, for
example, where a broker can provide best execution at a cost that is reasonable
in relation to its services and the broker offers unique or superior research
facilities, special knowledge or expertise in a Fund's relevant markets, or
access to proprietary information about companies that are a majority of a
Fund's investments.
Research information so received is in addition to and not in lieu of services
required to be performed by each Investment Adviser and does not reduce the fees
payable to an Investment Adviser by the Trust. Such information may be useful to
an Investment Adviser in serving both the Trust and other clients and,
conversely, supplemental information obtained by the placement of business of
other clients may be useful in carrying out its obligations to the Trust. While
each Investment Adviser generally seeks competitive commissions, the Trust may
not necessarily pay the lowest commission available on each brokerage
transaction for reasons discussed above.
Investment decisions for each Fund are made independently from those for the
other Funds or any other portfolio, investment company or account managed by
Qualivest or BB&T. Any such other portfolio, investment company or account may
also invest in the same securities as the Trust. When a purchase or sale of the
same security is made at substantially the same time on behalf of a Fund and
another Fund, portfolio, investment company or account, the transaction will be
averaged as to price and available investments will be allocated as to amount in
a manner which the Investment Adviser believes to be equitable to the Fund(s)
and such other portfolio, investment company or account. In some instances, this
investment procedure may adversely affect the price paid or received by a Fund
or the size of the position obtained by a Fund. To the extent permitted by law,
the Investment Adviser may aggregate the securities to be sold or purchased for
a Fund with those to be sold or purchased for the other Funds or for other
portfolio, investment companies or accounts in order to obtain best execution.
In making investment recommendations for the Trust, an Investment Adviser will
not inquire or take into consideration whether an issuer of securities proposed
for purchase or sale by the Trust is a customer of the Investment Adviser or
BISYS, their parents or their subsidiaries or affiliates and, in dealing with
its customers, Qualivest, BB&T, their parents, subsidiaries, and affiliates will
not inquire or take into consideration whether securities of such customers are
held by the Trust.
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Glass-Steagall Act
In 1971, the United States Supreme Court held that the Federal statute commonly
referred to as the "Glass-Steagall Act" prohibits a national bank from operating
a mutual fund for the collective investment of managing agency accounts.
Subsequently, the Board of Governors of the Federal Reserve System (the "Board")
issued a regulation and interpretation to the effect that the Glass-Steagall Act
and such decision: (a) forbid a bank holding company registered under the
Federal Bank Holding Company Act of 1956 (the "Holding Company Act") or any
non-bank affiliate thereof from sponsoring, organizing, or controlling a
registered, open-end investment company continuously engaged in the issuance of
its shares, but (b) do not prohibit such a holding company or affiliate from
acting as investment adviser, transfer agent, and custodian to such an
investment company. In 1981, the United States Supreme Court determined that the
Board did not exceed its authority under the Holding Company Act when it adopted
its regulation and interpretation authorizing bank holding companies and their
nonbank affiliates to act as investment advisers to registered closed-end
investment companies. The Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their nonbank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
The Investment Advisers believe that they possess the legal authority to perform
the services for the Funds contemplated by the Prospectus, this SAI and the
Investment Advisory Agreements without violation of applicable statutes and
regulations. Future changes in either federal or state statutes and regulations
relating to the permissible activities of banks or bank holding companies and
the subsidiaries or affiliates of those entities, as well as further judicial or
administrative decisions or interpretations of present and future statutes and
regulations, could prevent an Investment Adviser from continuing to serve as
investment adviser to the Funds or could restrict the services which it is
permitted to perform for the Funds. In addition, such changes, decisions or
interpretations could prevent an Investment Adviser's national bank affiliates
from performing Variable Contract Owner servicing activities or from receiving
compensation therefor or could restrict the types of services such entities are
permitted to provide and the amount of compensation they are permitted to
receive for such services. Depending upon the nature of any changes in the
services which could be provided by the Investment Advisers, the Board of
Trustees would review the Trust's relationship with the Investment Advisers and
consider taking all action necessary in the circumstances.
Administrator
BISYS serves as general manager and administrator to the Trust pursuant to a
Management and Administration Agreement dated June 1, 1997 (the "Administration
Agreement"). The Administrator assists in supervising all operations of each
Fund (other than those performed by Qualivest and BB&T under the Investment
Advisory Agreements, by BISYS Fund Services Ohio, Inc. as fund accountant and
dividend disbursing agent, and by the Trust's custodian(s)). The Administrator
is a broker-dealer registered with the Securities and Exchange Commission, and
is a member of the National Association of Securities Dealers, Inc. The
Administrator provides financial services to institutional clients.
Under the Administration Agreement, the Administrator has agreed to maintain
office facilities for the Trust; furnish statistical and research data, clerical
and certain bookkeeping services and stationery and office supplies; prepare the
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periodic reports to the Securities and Exchange Commission on Form N-SAR or any
replacement forms therefor; compile data for, prepare for execution by the Funds
and file certain federal and state tax returns and required tax filings; prepare
compliance filings pursuant to state laws with the advice of the Trust's
counsel; keep and maintain the financial accounts and records of the Funds,
including calculation of daily expense accruals; in the case of the Money Market
Fund, determine the actual variance from $1.00 of its net asset value per Share;
and generally assist in all aspects of the Trust's operations other than those
performed by the Investment Advisers under the Investment Advisory Agreements,
by the fund accountant and dividend disbursing agent, and by the Trust's
custodian(s). Under the Administration Agreement, the Administrator may delegate
all or any part of its responsibilities thereunder.
The Administrator receives a fee from each Fund for its services as
Administrator and expenses assumed pursuant to the Administration Agreement,
calculated daily and paid periodically, equal to the lesser of (a) the fee
calculated at the indicated annual rate of each Fund's average daily net assets,
or (b) such other fee as may from time to time be agreed upon by the Trust and
the Administrator: each Allocated Fund -- 0.07%; Money Market Fund -- 0.13%; and
Growth and Income Fund and Capital Manager Fund -- 0.20%. The Administrator may
voluntarily reduce all or a portion of its fee with respect to any Fund in order
to increase the net income of one or more of the Funds available for
distribution as dividends.
The Administration Agreement is terminable with respect to a particular Fund
upon mutual agreement of the parties to the Administration Agreement, upon
notice given at least 60 days prior to the expiration of the Agreement's
then-current term, and for cause (as defined in the Administration Agreement) by
the party alleging cause, on no less than 60 days' written notice by the Board
of Trustees or by the Administrator.
The Administration Agreement provides that the Administrator shall not be liable
for any error of judgment or mistake of law or any loss suffered by the Trust in
connection with the matters to which the Administration Agreement relates,
except a loss resulting from willful misfeasance, bad faith, or gross negligence
in the performance of its duties, or from the reckless disregard by the
Administrator of its obligations and duties thereunder.
Expenses
Any expense reimbursements will be estimated daily and reconciled and paid on a
monthly basis. Fees imposed upon customer accounts for cash management services
are not included within Trust expenses for purposes of any such expense
limitation.
Distributor
BISYS serves as distributor to the Trust pursuant to the Distribution Agreement
dated June 1, 1997 (the "Distribution Agreement"). Unless otherwise terminated,
the Distribution Agreement will remain in effect for an initial term of two
years, and thereafter continues for successive one-year periods if approved at
least annually (i) by the Board of Trustees or by the vote of a majority of the
outstanding Shares of the Trust, and (ii) by the vote of a majority of the
Trustees who are not parties to the Distribution Agreement or interested persons
(as defined in the 1940 Act) of any party to the Distribution Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
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Distribution Agreement may be terminated in the event of any assignment, as
defined in the 1940 Act.
Custodians, Transfer Agent and Fund Accounting Services
United States National Bank of Oregon, 321 S.W. 6th, Portland, Oregon 97204,
serves as custodian to the Trust with respect to each Allocated Fund and the
Money Market Fund pursuant to a Custody Agreement dated as of June 1, 1997.
Fifth Third Bank, 38 Fountain Square Plaza, Cincinnati, Ohio 45263, serves as
custodian to the Trust with respect to the Growth and Income Fund and the
Capital Manager Fund pursuant to as Custody Agreement dated as of May 21, 1997.
Each custodian's responsibilities include safeguarding and controlling the
Funds' cash and securities, handling the receipt and delivery of securities, and
collecting interest and dividends on such Funds' investments.
BISYS Fund Services Ohio Inc., 3435 Stelzer Road, Columbus, Ohio 43219-3035,
serves as transfer agent and dividend disbursing agent for all Funds of the
Trust pursuant to an agreement dated as of June 1, 1997. Under this agreement,
BISYS Fund Services Ohio, Inc. performs the following services, among others:
maintenance of Shareholder records for each of the Trust's Shareholders of
record; processing Shareholder purchase and redemption orders; processing
transfers and exchanges of Shares on the Shareholder files and records;
processing dividend payments and reinvestments; and assistance in the mailing of
Shareholder reports and proxy solicitation materials.
In addition, BISYS Fund Services Ohio, Inc. provides certain fund accounting
services to the Trust pursuant to a Fund Accounting Agreement dated June 1,
1997. Under the Fund Accounting Agreement, BISYS Fund Services Ohio, Inc.
maintains the accounting books and records for the Funds, including journals
containing an itemized daily record of all purchases and sales of portfolio
securities, all receipts and disbursements of cash and all other debits and
credits, general and auxiliary ledgers reflecting all asset, liability, reserve,
capital, income and expense accounts, including interest accrued and interest
received, and other required separate ledger accounts; maintains a monthly trial
balance of all ledger accounts; performs certain accounting services for the
Funds, including calculation of the daily net asset value per Share, calculation
of the dividend and capital gain distributions, if any, and of yield,
reconciliation of cash movements with custodians, affirmation to custodians of
portfolio trades and cash settlements, verification and reconciliation with
custodians of daily trade activity; provides certain reports; obtains dealer
quotations, prices from a pricing service or matrix prices on all portfolio
securities in order to mark the portfolio to the market; and prepares an interim
balance sheet, statement of income and expense, and statement of changes in net
assets for the Funds.
Auditors
The firm of Coopers & Lybrand L.L.P., 100 East Broad Street, Columbus, Ohio
43215, serves as independent auditors for the Trust. Its services comprise
auditing the Trust's financial statements and advising the Trust as to certain
accounting and tax matters.
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Legal Counsel
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C. 20005 is counsel
to the Trust and has passed upon the legality of the Shares offered hereby.
ADDITIONAL INFORMATION
Description of Shares
The Trust is a Massachusetts business trust. The Trust was organized on July 20,
1994, and the Trust's Declaration of Trust was filed with the Secretary of State
of the Commonwealth of Massachusetts on the same date. The Declaration of Trust,
as amended and restated, authorizes the Board of Trustees to issue an unlimited
number of Shares, which are units of beneficial interest, without par value. The
Trust currently has seven series of Shares which represent interests in each
series of the Trust. The Trust's Declaration of Trust authorizes the Board of
Trustees to divide or redivide any unissued Shares of the Trust into one or more
additional series or classes by setting or changing in any one or more respects
their respective preferences, conversion or other rights, voting power,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption.
Shares have no subscription or preemptive rights and only such conversion or
exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectus and this SAI, the Trust's
Shares will be fully paid and non-assessable by the Trust. In the event of a
liquidation or dissolution of the Trust, Shareholders of a Fund are entitled to
receive the assets available for distribution belonging to that Fund, and a
proportionate distribution, based upon the relative asset values of the
respective series, of any general assets not belonging to any particular series
which are available for distribution.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of an investment company
such as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding Shares of each Fund
affected by the matter. For purposes of determining whether the approval of a
majority of the outstanding Shares of a Fund will be required in connection with
a matter, a Fund will be deemed to be affected by a matter unless it is clear
that the interests of each Fund in the matter are identical, or that the matter
does not affect any interest of the Fund. Under Rule 18f-2, the approval of an
investment advisory agreement or any change in investment policy submitted to
Shareholders would be effectively acted upon with respect to a series only if
approved by a majority of the outstanding Shares of such Fund. However, Rule
18f-2 also provides that the ratification of independent public accountants, the
approval of principal underwriting contracts, and the election of Trustees may
be effectively acted upon by Shareholders of the Trust voting without regard to
Fund.
Vote of a Majority of the Outstanding Shares
As used in the Funds' Prospectus and the SAI, "vote of a majority of the
outstanding Shares of the Trust or the Fund" means the affirmative vote, at an
annual or special meeting of Shareholders duly called, of the lesser of (a) 67%
or more of the votes of Shareholders of the Trust or the Fund present at such
meeting at which the holders of more than 50% of the votes attributable to the
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Shareholders of record of the Trust or the Fund are represented in person or by
proxy, or (b) the holders of more than 50% of the outstanding votes of
Shareholders of the Trust or the Fund.
Shareholder and Trustee Liability
Under Massachusetts law, holders of units of interest in a business trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. However, the Trust's Declaration of Trust provides
that Shareholders shall not be subject to any personal liability for the
obligations of the Trust. The Declaration of Trust provides for indemnification
out of the trust property of any Shareholder held personally liable solely by
reason of his or her being or having been a Shareholder. The Declaration of
Trust also provides that the Trust shall, upon request, reimburse any
Shareholder for all legal and other expenses reasonably incurred in the defense
of any claim made against the Shareholder for any act or obligation of the
Trust, and shall satisfy any judgment thereon. Thus, the risk of a Shareholder
incurring financial loss on account of Shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations.
The Declaration of Trust states further that no Trustee, officer, or agent of
the Trust shall be personally liable in connection with the administration or
preservation of the assets of the Trust or the conduct of the Trust's business;
nor shall any Trustee, officer, or agent be personally liable to any person for
any action or failure to act except for his own bad faith, willful misfeasance,
gross negligence, or reckless disregard of his duties. The Declaration of Trust
also provides that all persons having any claim against the Trustees or the
Trust shall look solely to the assets of the Trust for payment.
Additional Tax Information
The following discussion summarizes certain U.S. federal tax considerations
incidental to an investment in a Fund. Each Fund intends to qualify annually and
to elect to be treated as a regulated investment company under the Internal
Revenue Code of 1986 , as amended (the "Code").
To qualify as a regulated investment company, each Fund generally must, among
other things: (i) derive in each taxable year at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, and gains
from the sale or other disposition of stock, securities or foreign currencies,
or other income derived with respect to its business in such stock, securities
or currencies; (ii) derive in each taxable year less than 30% of its gross
income from the sale or other disposition of certain assets held less than three
months including stocks, securities, and certain foreign currencies, futures,
options, and forward contracts; (iii) diversify its holdings so that, at the end
of each quarter of the taxable year (a) at least 50% of the market value of the
Fund's assets is represented by cash, U.S. Government securities, the securities
of other regulated investment companies and other securities, with such other
securities of any one issuer limited for the purposes of this calculation to an
amount not greater than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer, and (b) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities or the securities of other regulated
investment companies); and (iv) distribute at least 90% of its investment
company taxable income (which includes, among other items, dividends, interest,
and net short-term capital gains in excess of any net long-term capital losses)
each taxable year.
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As a regulated investment company, a Fund generally will not be subject to U.S.
federal income tax on its investment company taxable income and net capital
gains (any net long-term capital gains in excess of the sum of net short-term
capital losses and capital loss carryovers from prior years), if any, that it
distributes to Shareholders. Each Fund intends to distribute to its
Shareholders, at least annually, substantially all of its investment company
taxable income and any net capital gains. In addition, amounts not distributed
by a Fund on a timely basis in accordance with a calendar year distribution
requirement may be subject to a nondeductible 4% excise tax. To avoid the tax, a
Fund may be required to distribute (or be deemed to have distributed) during
each calendar year, (i) at least 98% of its ordinary income (not taking into
account any capital gains or losses) for the calendar year, (ii) at least 98% of
its capital gains in excess of its capital losses for the twelve month period
ending on October 31 of the calendar year (adjusted for certain ordinary
losses), and (iii) all ordinary income and capital gains for previous years that
were not distributed during such years. To avoid application of the excise tax,
each Fund intends to make its distributions in accordance with the calendar year
distribution requirement. A distribution will be treated as paid on December 31
of the calendar year if it is declared by a Fund during October, November, or
December of that year to Shareholders of record on a date in such a month and
paid by the Fund during January of the following calendar year. Such
distributions will be taxable to Shareholders (such as the Separate Accounts)
for the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are actually received.
If a Fund invests in shares of a foreign investment company, the Fund may be
subject to U.S. federal income tax on a portion of an "excess distribution"
from, or of the gain from the sale of part or all of the shares in, such
company. In addition, an interest charge may be imposed with respect to deferred
taxes arising from such distributions or gains.
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time a Fund accrues income or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and the
time that Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss. Similarly, on
disposition of debt securities denominated in a foreign currency and on
disposition of certain futures contracts, forward contracts, and options, gains
or losses attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security or contract and the date of disposition
also are treated as ordinary gain or loss. These gains or losses, referred to
under the Code as "Section 988" gains or losses, may increase or decrease the
amount of a Fund's investment company taxable income to be distributed to its
Shareholders as ordinary income.
Distributions
Distributions of any investment company taxable income (which includes among
other items, dividends, interest, and any net realized short-term capital gains
in excess of net realized long-term capital losses) are treated as ordinary
income for tax purposes in the hands of a Shareholder (such as a Separate
Account). Net capital gains (the excess of any net long-term capital gains over
net short term capital losses) will, to the extend distributed, be treated as
long-term capital gains in the hands of the Separate Accounts regardless of the
length of time a Separate Account may have held the Shares.
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Hedging Transactions
The 30% limitation and the diversification requirements applicable to a Fund's
assets may limit the extent to which a Fund will be able to engage in
transactions in options, futures contracts, or forward contracts.
Other Taxes
Distributions may also be subject to additional state, foreign and local taxes,
depending on each shareholder's situation. Shareholders are advised to consult
their own tax advisers with respect to the particular tax consequences to them
of an investment in a Fund.
Performance Information
Each Fund may, from time to time, include its yield or total return in
advertisements or reports to Shareholders or prospective investors. Performance
information for the Funds will not be advertised or included in sales literature
unless accompanied by comparable performance information for a separate account
to which the Funds offer their Shares.
Standardized seven-day yield for the Money Market Fund is computed by
determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account in that Fund having a balance of one Share at
the beginning of the period, subtracting a hypothetical charge reflecting
deductions from Shareholder accounts, and dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return, and then multiplying the base period return by (365/base period). The
net change in the account value of the Money Market Fund includes the value of
additional Shares purchased with dividends from the original Share, dividends
declared on both the original Share and any such additional Shares, and all
fees, other than nonrecurring account charges, that are charged to all
Shareholder accounts in proportion to the length of the base period and assuming
that Fund's average account size. The capital changes to be excluded from the
calculation of the net change in account value are net realized gains and losses
from the sale of securities and unrealized appreciation and depreciation. The
30-day yield is calculated as described above except that the base period is 30
days rather than seven days.
Yields of the other Funds are computed by analyzing net investment income per
Share for a recent 30-day period and dividing that amount by a Share's maximum
offering price (reduced by any undeclared earned income expected to be paid
shortly as a dividend) on the last trading day of that period. Net investment
income will reflect amortization of any market value premium or discount of
fixed income securities (except for obligations backed by mortgages or other
assets) and may include recognition of a pro rata portion of the stated dividend
rate of dividend paying portfolio securities. The yield of each of these Funds
will vary from time to time depending upon market conditions, the composition of
a Fund's portfolio and operating expenses of the Trust allocated to each Fund.
Yield should also be considered relative to changes in the value of a Fund's
Shares and to the relative risks associated with the investment objective and
policies of each of the Funds.
At any time in the future, yields may be higher or lower than past yields and
there can be no assurance that any historical results will continue.
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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. and
The Russell 2000 Index and to data prepared by Lipper Analytical Services, Inc.,
a widely recognized independent service which monitors the performance of mutual
funds, Morningstar, Inc. and the Consumer Price Index. Comparisons may also be
made to indices or data published in Money Magazine, Forbes, Barron's, The Wall
Street Journal, The Bond Buyer's Weekly 20-Bond Index, The Bond Buyer's Index,
The Bond Buyer, The New York Times, Business Week, Pensions and Investments, and
U.S.A. Today. In addition to performance information, general information about
these Funds that appears in a publication such as those mentioned above may be
included in advertisements and in reports to Variable Contract Owners.
Each Fund may also compute aggregate total return for specified periods. The
aggregate total return is determined by dividing the net asset value of this
account at the end of the specified period by the value of the initial
investment and is expressed as a percentage. Calculation of aggregate total
return assumes reinvestment of all income dividends and capital gain
distributions during the period.
The Funds also may quote annual, average annual and annualized total return and
aggregate total return performance data for various periods other than those
noted above. Such data will be computed as described above, except that the
rates of return calculated will not be average annual rates, but rather, actual
annual, annualized or aggregate rates of return.
Quotations of yield or total return for the Funds will not take into account
charges and deductions against a Separate Account to which the Funds' Shares are
sold or charges and deductions against the Variable Contracts. The Funds' yield
and total return should not be compared with mutual funds that sell their shares
directly to the public since the figures provided do not reflect charges against
the Separate Accounts or the Variable Contracts. Performance information for any
Fund reflects only the performance of a hypothetical investment in the Fund
during the particular time period in which the calculations are based.
Performance information should be considered in light of the Funds' investment
objectives and policies, characteristics and quality of the portfolios and the
market conditions during the given time period, and should not be considered as
a representation of what may be achieved in the future.
29
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Miscellaneous
Individual Trustees are elected by the Shareholders and, subject to removal by
the vote of two-thirds of the Board of Trustees, serve for a term lasting until
the next meeting of Shareholders at which Trustees are elected. Such meetings
are not required to be held at any specific intervals. Individual Trustees may
be removed by vote of the Shareholders voting not less than a majority of the
Shares then outstanding, cast in person or by proxy at any meeting called for
that purpose, or by a written declaration signed by Shareholders voting not less
than two-thirds of the Shares then outstanding. In accordance with current laws,
it is anticipated that an insurance company issuing a variable contract that
participates in the Funds will request voting instructions from variable
contract owners and will vote shares or other voting interests in the separate
account in proportion of the voting instructions received. The Separate Accounts
and qualified pension and retirement plans currently are the only Shareholders
of the Funds, although other separate accounts of Nationwide or Hartford, or
other insurance companies, may become Shareholders in the future.
The Trust is registered with the Securities and Exchange Commission as a
management investment company. Such registration does not involve supervision by
the Securities and Exchange Commission of the management or policies of the
Trust.
The Prospectus and this SAI omit certain of the information contained in the
Registration Statement filed with the Securities and Exchange Commission. Copies
of such information may be obtained from the Securities and Exchange Commission
upon payment of the prescribed fee.
The Prospectus and this SAI are not an offering of the securities herein
described in any state in which such offering may not lawfully be made. No
salesman, dealer, or other person is authorized to give any information or make
any representation other than those contained in the Prospectus and this SAI.
FINANCIAL STATEMENTS
The Trust's financial statements for the Funds, including the related notes
thereto, dated as of May 21, 1997, are included herein.
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Report of Independent Accountants
To the Trustees of the Variable Insurance Funds:
We have audited the accompanying statement of assets and liabilities of the BB&T
Growth and Income Fund as of May 21, 1997. This financial statement is the
responsibility of the Variable Insurance Funds' management. Our responsibility
is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free from material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of the BB&T Growth and Income Fund
as of May 21, 1997, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
May 22, 1997
<PAGE>
VARIABLE INSURANCE FUNDS
BB&T Growth and Income Fund
Statement of Assets and
Liabilities
As of May 21, 1997
ASSETS:
Cash $100,000
Deferred organization expenses 15,000
Total Assets 115,000
LIABILITIES:
Accrued organization expenses 15,000
NET ASSETS: $100,000
NET ASSETS CONSIST OF:
Capital - 10,000 shares of beneficial interest issued and outstanding;
unlimited shares authorized (par value $0.001) - Institutional Service
Class $100,000
NET ASSET VALUE:
Institutional Service Shares ($100,000/10,000 shares issued
and outstanding) - offering and redemption price per share $10.00
See notes to financial statements.
<PAGE>
VARIABLE INSURANCE FUNDS
BB&T Growth and Income Fund
NOTES TO FINANCIAL STATEMENTS
May 21, 1997
1. ORGANIZATION
Variable Insurance Funds (the "Trust"), an open-end management
investment company established as a Massachusetts business trust, is
registered under the Investment Company Act of 1940 (the "1940 Act").
The Company offers shares of the following funds: Variable Insurance
Allocated Conservative Fund, Variable Insurance Allocated Balanced
Fund, Variable Insurance Allocated Growth Fund, Variable Insurance
Allocated Aggressive Fund (collectively, the "Allocated Funds"),
Variable Insurance Money Market Fund, BB&T Growth and Income Fund and
BB&T Capital Manager Fund (collectively, the "Funds") each of which
offers Institutional Shares. The accompanying financial statement
relates only to the BB&T Growth and Income Fund (the "Fund"). The Fund
had no operations other than those actions relating to organizational
matters. As of May 21, 1997, all outstanding shares of the Fund are
owned by Branch Banking and Trust Company.
The investment objective of the Fund is to seek to provide capital
growth, current income or both by investing in stocks, which may
include common stock, preferred stock, warrants, or debt instruments
that are convertible into common stocks.
2. ORGANIZATION EXPENSES
All costs incurred by the Trust in connection with the organization of
the Fund and the initial public offering of shares of the Fund,
principally professional fees and printing, have been deferred. Upon
commencement of operations of the Fund, the deferred organization
expenses will be amortized on a straight-line basis over a period of
two years. In the event that any of the initial shares of the Fund are
redeemed during the amortization period by any holder thereof, the
redemption proceeds will be reduced by any unamortized organization
expenses in the same proportion as the number of said shares being
redeemed bears to the number of initial shares that are outstanding at
the time of the redemption.
3. RELATED PARTY TRANSACTIONS
Branch Banking and Trust Company ("BB&T") serves as the Investment
Advisor for the Growth and Income Fund. Under an advisory agreement
with the Fund, BB&T is entitled to receive fees at an annual rate equal
to the lessor of : (a) 0.74% of the Fund's average daily net assets; or
(b) such fee as may from time to time be agreed upon in writing by the
Trust and BB&T. BISYS Fund Services ("BISYS") serves the Fund as
Administrator. For its services as Administrator, BISYS receives a fee
at an amount of 0.20% of the Fund's average daily net assets. BISYS
also serves as Distributor for the Fund's shares. BISYS Fund Services
Ohio, Inc., an affiliate of BISYS, serves as the Trust's transfer agent
and dividend disbursing agent.
Certain officers of the Trust are affiliated with BISYS. Such persons
are not paid directly by the Trust for serving in those capacities.
4. ESTIMATES
The preparation of this financial statement requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statement. Actual results
could differ from those estimates.
<PAGE>
APPENDIX
DESCRIPTION OF BOND RATINGS
Description of Moody's bond ratings:
Excerpts from Moody's description of its bond ratings are listed as
follows: Aaa - judged to be the best quality and they carry the smallest degree
of investment risk; Aa - judged to be of high quality by all standards together
with the Aaa group, they comprise what are generally known as high-grade bonds;
A - possess many favorable investment attributes and are to be considered as
"upper medium grade obligations"; Baa - considered to be medium grade
obligations, i.e., they are neither highly protected nor poorly secured
- -interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time; Ba - judged to have speculative
elements, their future cannot be considered as well assured; B - generally lack
characteristics of the desirable investment; Caa - are of poor standing - such
issues may be in default or there may be present elements of danger with respect
to principal or interest; Ca - speculative in a high degree, often in default; C
- - lowest rated class of bonds, regarded as having extremely poor prospects.
Moody's also supplies numerical indicators 1, 2 and 3 to rating categories.
The modifier 1 indicates that the security is in the higher end of its rating
category; the modifier 2 indicates a mid-range ranking; and modifier 3 indicates
a ranking toward the lower end of the category.
Description of S&P's bond ratings:
Excerpts from S&P's description of its bond ratings are listed as follows:
AAA - highest grade obligations, in which capacity to pay interest and repay
principal is extremely strong; AA - has a very strong capacity to pay interest
and repay principal, and differs from AAA issues only in a small degree; A - has
a strong capacity to pay interest and repay principal, although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories; BBB - regarded as
having an adequate capacity to pay interest and repay principal; whereas it
normally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories. This group is the lowest which qualifies for commercial bank
investment. BB, B, CCC, CC, C - predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with terms of the
obligations; BB indicates the highest grade and C the lowest within the
speculative rating categories. D - interest or principal payments are in
default.
S&P applies indicators "+," no character, and "-" to its rating categories.
The indicators show relative standing within the major rating categories.
Description of Moody's ratings of short-term municipal obligations:
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or MIG. Such ratings recognize the
differences between short-term credit and long-term risk. Short-term ratings on
issues with demand features (variable rate demand obligations) are
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differentiated by the use of the VMIG symbol to reflect such characteristics as
payment upon periodic demand rather than fixed maturity dates and payments
relying on external liquidity. Ratings categories for securities in these groups
are as follows: MIG 1/VMIG 1 - denotes best quality, there is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing; MIG 2/VMIG 2 - denotes high
quality, margins of protection are ample although not as large as in the
preceding group; MIG 3/VMIG 3 - denotes high quality, all security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades; MIG 4/VMIG 4 - denotes adequate quality, protection commonly regarded as
required of an investment security is present, but there is specific risk; SQ
denotes speculative quality, instruments in this category lack margins of
protection.
Description of Moody's commercial paper ratings:
Excerpts from Moody's commercial paper ratings are listed as follows: Prime
- - 1 - issuers (or supporting institutions) have a superior ability for repayment
of senior short-term promissory obligations; Prime - 2 - issuers (or supporting
institutions) have a strong ability for repayment of senior short-term
promissory obligations; Prime - 3 - issuers (or supporting institutions) have an
acceptable ability for repayment of senior short-term promissory obligations;
Not Prime - issuers do not fall within any of the Prime categories.
Description of S&P's ratings for corporate and municipal bonds:
Investment grade ratings: AAA - the highest rating assigned by S&P,
capacity to pay interest and repay principal is extremely strong; AA - has a
very strong capacity to pay interest and repay principal and differs from the
highest rated issues only in a small degree; A - has strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories; BBB regarded as having an adequate capacity to pay
interest and repay principal - whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Speculative grade ratings: BB, B, CCC, CC, C - debt rated in these
categories is regarded as having predominantly speculative characteristics with
respect to capacity to pay interest and repay principal - while such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions; CI - reserved
for income bonds on which no interest is being paid; D -in default, and payment
of interest and/or repayment of principal is in arrears. Plus (+) or Minus (-)
the ratings from "AA" to "CCC" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Description of S&P's rating for municipal notes and short-term municipal demand
obligations:
Rating categories are as follows: SP-1 - has a very strong or strong
capacity to pay principal and interest - those issues determined to possess
overwhelming safety characteristics will be given a plus (+) designation; SP-2
has a satisfactory capacity to pay principal and interest; SP-3 - issues
carrying this designation have a speculative capacity to pay principal and
interest. Description of S&P's ratings for short-term corporate demand
obligations and commercial paper:
An S&P commercial paper rating is a current assessment of the likelihood of
timely repayment of debt having an original maturity of no more than 365 days.
Excerpts from S&P's description of its commercial paper ratings are listed as
follows: A-1 - the degree of safety regarding timely payment is strong - those
issues determined to possess extremely strong safety characteristics will be
denoted with a plus (+) designation; A-2 - capacity for timely payment is
satisfactory however, the relative degree of safety is not as high as for issues
designated "A-1;" A-3 - has adequate capacity for timely payment - however, is
more vulnerable to the adverse effects of changes in circumstances than
obligations carrying the higher designations; B - regarded as having only
speculative capacity for timely payment; C - a doubtful capacity for payment; D
- - in payment default - the "D" rating category is used when interest payments or
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.
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