As filed with the Securities and Exchange Commission on April 29, 1998
File Nos. 33-81800
811-8644
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Post-Effective Amendment No. 4 /X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No.6 /X/
VARIABLE INSURANCE FUNDS
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road, Columbus, Ohio 43219
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: 1-800-257-5872
Keith T. Robinson
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20006
Copies to:
Richard Ille
BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219-3035
It is proposed that this filing will become effective (check appropriate
box):
[] immediately upon filing pursuant to paragraph (b)
[X] on May 1, 1998 pursuant to paragraph (b)
[] 60 days after filing pursuant to paragraph (a)(1)
[] On (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[] on (date) pursuant to paragraph (a)(2) of Rule 485
<PAGE>
VARIABLE INSURANCE FUNDS
CROSS REFERENCE SHEET
Required by Rule 404
under the Securities Act of 1933
BB&T CAPITAL MANAGER FUND
Form N-1A Part A Item Prospectus Caption
1. Cover page.................. Cover Page
2. Synopsis.................... Prospectus Summary; Fund Expenses
3. Condensed Financial
Information................. Not Applicable
4. General Description of
Registrant.................. Investment Objectives and
Policies; Investment Objectives
and Policies-Underlying Funds;
Investment Techniques and Risk
Factors; General Information
5. Management of the Fund...... Management of the Fund
5A. Management's Discussion of
Fund Performance............ Not Applicable
6. Capital Stock and Other
Securities.................. Taxation; General Information
7. Purchase of Securities
Being Offered............... Valuation of Shares; Purchasing
Shares; Management of the Fund
8. Redemption or Repurchase.... Redeeming Shares
9. Pending Legal Proceedings... Not applicable
<PAGE>
VARIABLE INSURANCE FUNDS
CROSS REFERENCE SHEET
Required by Rule 404
under the Securities Act of 1933
BB&T GROWTH AND INCOME FUND
Form N-1A Part A Item Prospectus Caption
1. Cover page.................. Cover Page
2. Synopsis.................... Prospectus Summary; Fund Expenses
3. Condensed Financial
Information................. Financial Highlights
4. General Description of
Registrant.................. Investment Objective and
Policies; Investment Techniques
and Risk Factors; General
Information
5. Management of the Fund...... Management of the Fund
5A. Management's Discussion of
Fund Performance............ Not Applicable
6. Capital Stock and Other
Securities.................. Taxation; General Information
7. Purchase of Securities
Being Offered............... Valuation of Shares; Purchasing
Shares; Management of the Fund
8. Redemption or Repurchase.... Redeeming Shares
9. Pending Legal Proceedings... Not applicable
<PAGE>
VARIABLE INSURANCE FUNDS
CROSS REFERENCE SHEET
Required by Rule 404
under the Securities Act of 1933
AMSOUTH REGIONAL EQUITY FUND
Form N-1A Part A Item Prospectus Caption
1. Cover page.................. Cover Page
2. Synopsis.................... Prospectus Summary; Fund Expenses
3. Condensed Financial
Information................. Not Applicable
4. General Description of
Registrant.................. Investment Objectives and
Policies; Investment Techniques
and Risk Factors; General
Information
5. Management of the Fund...... Management of the Fund
5A. Management's Discussion of
Fund Performance............ Not Applicable
6. Capital Stock and Other
Securities.................. Taxation; General Information
7. Purchase of Securities
Being Offered............... Valuation of Shares; Purchasing
Shares; Management of the Fund
8. Redemption or Repurchase.... Redeeming Shares
9. Pending Legal Proceedings... Not applicable
<PAGE>
VARIABLE INSURANCE FUNDS
CROSS REFERENCE SHEET
Required by Rule 404
under the Securities Act of 1933
AMSOUTH EQUITY INCOME FUND
Form N-1A Part A Item Prospectus Caption
1. Cover page.................. Cover Page
2. Synopsis.................... Prospectus Summary; Fund Expenses
3. Condensed Financial
Information................. Financial Highlights
4. General Description of
Registrant.................. Investment Objectives and
Policies; Investment Techniques
and Risk Factors; General
Information
5. Management of the Fund...... Management of the Fund
5A. Management's Discussion of
Fund Performance............ Not Applicable
6. Capital Stock and Other
Securities.................. Taxation; General Information
7. Purchase of Securities
Being Offered............... Valuation of Shares; Purchasing
Shares; Management of the Fund
8. Redemption or Repurchase.... Redeeming Shares
9. Pending Legal Proceedings... Not applicable
<PAGE>
VARIABLE INSURANCE FUNDS
CROSS REFERENCE SHEET
Required by Rule 404
under the Securities Act of 1933
BB&T GROWTH AND INCOME FUND
BB&T CAPITAL MANAGER FUND
AMSOUTH REGIONAL EQUITY FUND
AMSOUTH EQUITY INCOME FUND
Statement of Additional
Form N-1A Part B Item Information Caption
10. Cover Page.................. Cover Page
11. Table of Contents........... Table of Contents
12. General Information and
History..................... Not Applicable
13. Investment Objectives and
Policies.................... Investment Objectives and Policies;
Investment Restrictions
14. Management of the Fund...... Management of the Trust - Trustees
and Officers
15. Control Persons and Principal
Holders of Securities........ Management of the Trust - Trustees
and Officers
16. Investment Advisory and Other
Services.................... Management of the Trust -Investment
Advisers; Management of the Trust -
Custodians, Transfer Agent and Fund
Accounting Services; Management of
the Trust - Auditors
17. Brokerage Allocation........ Management of the Trust - Portfolio
Transactions
<PAGE>
18. Capital Stock and Other
Securities.................. Additional Information -
Description of Shares; Additional
Information - Shareholder and
Trustee Liability
19. Purchase, Redemption and
Pricing of Securities
Being Offered............... Additional Purchase and Redemption
Information
20. Tax Status.................. Additional Information - Additional
Tax Information
21. Underwriters................ Management of the Trust -
Distributor
22. Calculation of Performance
Data........................ Performance Information
23. Financial Statements........ Financial Statements
<PAGE>
BB&T Capital Manager Fund
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
1-800-257-5872
Variable Insurance Funds (the "Trust") is an open-end management investment
company which currently comprises four separate diversified investment
portfolios, each with different investment objectives and policies. This
Prospectus describes one of those portfolios, the BB&T Capital Manager Fund (the
"Fund"). The Fund seeks its investment objective by investing in a diversified
portfolio of certain funds offered by The BB&T Mutual Funds Group, an affiliated
open-end investment company.
Additional information about the Trust and the Fund, contained in a Statement of
Additional Information dated May 1, 1998, as amended or supplemented, has been
filed with the Securities and Exchange Commission and is available upon request
without charge by writing to the Trust at its address or by calling the Trust at
the telephone number shown above. The Statement of Additional Information is
incorporated herein by reference.
The Fund currently sells its shares of beneficial interest ("Shares") to a
segregated asset account ("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 may be sold to qualified pension and
retirement plans outside of the separate account context. The Separate Account
invests in shares of the Fund in accordance with allocation instructions
received from owners of the Variable Contracts ("Variable Contract Owners").
Such allocation rights are described further in the Separate Account prospectus.
Shares of the Fund are not deposits or obligations of, and are not endorsed,
insured or guaranteed by, any bank, the Federal Deposit Insurance Corporation,
or any other agency. An investment in the Fund involves investment risk,
including the possible loss of principal.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Investors should read this
Prospectus and retain it for future reference.
THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF THE
RELEVANT SEPARATE ACCOUNT. BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND
RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1998.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY...................................
Shares Offered..............................
Investment Objectives.......................
Investment Policies.........................
Risk Factors and Special Considerations.....
Investment Advisers.........................
Other Information...........................
FUND EXPENSES........................................
INVESTMENT OBJECTIVE AND POLICIES....................
INVESTMENT OBJECTIVES AND POLICIES--UNDERLYING FUNDS.
BB&T Equity Funds...........................
BB&T INCOME FUNDS....................................
BB&T MONEY FUND......................................
INVESTMENT TECHNIQUES AND RISK FACTORS...............
VALUATION OF SHARES..................................
PURCHASING SHARES....................................
REDEEMING SHARES....................................
MANAGEMENT OF THE FUND..............................
Trustees...................................
Investment Adviser.........................
Administrator and Distributor..............
Other Service Providers....................
Variable Contract Owner Servicing Agents...
Expenses...................................
Banking Laws...............................
Year 2000 .................................
TAXATION............................................
GENERAL INFORMATON..................................
Description of the Trust and Its Shares....
Performance Information....................
Miscellaenous..............................
<PAGE>
PROSPECTUS SUMMARY
Shares Offered . . . . . . . . . . . . Shares of the Fund, a diversified
investment portfolio of the Trust, a
Massachusetts business trust which is
registered as an open-end management
investment company. Shares of the Fund
may be offered to qualified pension and
retirement plans. Shares of the Funds
may be offered in the future to other
separate accounts of Hartford, or to
separate accounts established by other
affiliated or unaffiliated insurance
companies, to serve as the underlying
investment medium for variable annuity
and variable life insurance contracts,
which may pose certain risks discussed
under "PURCHASING SHARES."
Investment Objectives. . . . . . . . . The Fund seeks to provide capital
appreciation.
Investment Policies . . . . . . . . . . The Fund seeks its investment objective
by investing in diversified portfolios
of certain funds (the "Underlying BB&T
Funds") offered by The BB&T Mutual Funds
Group (the "Group"), an affiliated
open-end investment company. See
"INVESTMENT OBJECTIVES AND POLICIES."
Risk Factors and Special
Considerations . . . . . . . . . . An investment in the Fund involves a
certain amount of risk and may not be
suitable for all investors. See
"INVESTMENT TECHNIQUES AND RISK
FACTORS."
Investment Advisers . . . . . . . . . . Branch Banking and Trust Company
("BB&T"), Raleigh, North Carolina,
serves as investment adviser to the
Fund. See "MANAGEMENT OF THE FUND -
Investment Adviser."
Other Information . . . . . . . . . . Fifth Third Bank (the "Custodian"), is
the custodian for the Fund. BISYS Fund
Services ("BISYS" or "Distributor" or
"Administrator") serves as the
distributor and administrator of the
Funds. BISYS Fund Services Ohio, Inc.
serves as transfer agent and dividend
disbursing agent and provides certain
accounting services for the Trust.
<PAGE>
FUND EXPENSES
The following expense table indicates costs and expenses that an investor should
anticipate incurring either directly or indirectly as a Shareholder of the Fund
during its first fiscal year of operation. The numbers reflect estimated levels
of operating expenses.
Annual Fund Operating Expenses
(as a percentage of average net assets annualized)
Management Fees After Waiver (1).......................0.10%
Other Expenses.........................................0.46%
-----
Total Fund Operating Expenses After Waiver (2).........0.56%
-----
-----
- --------------------
1 BB&T has agreed to temporarily waive a portion of its investment advisory
fee for the Fund. Waived fees cannot be recovered at a future date. Absent the
advisory fee waiver, "Management Fees" as a percentage of average daily net
assets would be 0.25% for the Fund. See "MANAGEMENT OF THE FUND--Investment
Adviser."
2 Absent the waiver of the investment advisory fee, "Total Fund Operating
Expenses" as a percentage of average daily net assets would be 0.71% for the
Fund.
In addition to the expenses shown above, Shareholders of the Fund will
indirectly bear their pro rata share of fees and expenses incurred by
the Underlying Funds, so that the investment returns of the Fund will
be net of the expenses of the Underlying Funds as discussed below
under "MANAGEMENT OF THE FUND--Investment Adviser." Based on the
expenses for the Fund and the Underlying Funds, the average weighted
expense ratio for the Fund, expressed as a percentage of average daily
net assets, is estimated to be 1.78%.
The purpose of this table is to assist the prospective investor in
understanding the various costs and expenses that a Shareholder in the
Fund will bear. The following Example illustrates the expenses borne
by Fund Shareholders, including the pro rata share of the costs and
expenses of the Underlying Fund.
Example*
An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, and (2) redemption at the end of each
time period:
Expenses
1 Year . . . $ 18
3 Years. . . $ 56
---------------
* This example should not be considered a representation of future expenses,
which may be more or less than those shown. The assumed 5% annual return is
hypothetical and should not be considered a representation of past or
future annual return. Actual return may be greater or less than the assumed
amount.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Shareholders should be aware that the investments made by the Fund at any given
time are not expected to be the same as those made by other mutual funds for
which BB&T acts as invest0ment adviser, including mutual funds with investment
objectives and policies similar to the Fund. Investors should carefully consider
their investment goals and willingness to tolerate investment risk before
allocating their investment to the Fund.
The investment objective of the Fund is to seek capital appreciation. Under
normal market conditions, it invests primarily in a group of diversified
Underlying Funds that invest primarily in equity securities. However, it may
also invest a portion of its assets in Underlying Funds that invest primarily in
fixed income securities or money market instruments.
The Fund's net asset value will fluctuate with changes in the equity markets and
the value of the Underlying Funds in which it invests. The Fund's investment
return is diversified by its investment in the Underlying Funds, which invest in
growth and income stocks, foreign securities, debt securities, and cash and cash
equivalents.
The allocation of the Fund's assets among the Underlying Funds will be made by
BB&T under the supervision of the Board of Trustees. BB&T will make allocation
decisions according to its outlook for the economy, financial markets, and
relative market valuation of the Underlying Funds. There is no assurance that
the Fund will achieve its stated objective.
For temporary cash management and liquidity purposes, the Fund may also hold
cash and invest in short-term obligations (with maturities of 12 months or less)
consisting of commercial paper (including variable amount master demand notes)
and obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. The Fund and the Underlying Funds are permitted for temporary
defensive purposes to invest up to 100% of their assets in short-term fixed
income securities. Such securities include obligations of the U.S. Government
and its agencies and instrumentalities, commercial paper, bank certificates of
deposit, repurchase agreements, bankers' acceptances, variable amount master
demand notes, and bank money market deposit accounts. To the extent the Fund or
an Underlying Fund is engaged in a temporary defensive position, it will not be
pursuing its investment objective. See "INVESTMENT TECHNIQUES AND RISK FACTORS"
for a description of these investments.
The investments of the Fund are concentrated in the Underlying Funds, so the
Fund's performance is directly related to the performance of the Underlying
Funds. The Fund will invest in shares of the Underlying Funds which are sold at
net asset value per share with no front-end sales charge or contingent deferred
sales charge. See "INVESTMENT OBJECTIVES AND POLICIES - UNDERLYING FUNDS" for a
description of the Underlying Funds in which the Fund invests.
* * * *
<PAGE>
The investment objective of the Fund is a fundamental policy and as such may not
be changed without a vote of the holders of a majority of the outstanding Shares
of the Fund. Other policies of the Fund may be changed without a vote of the
holders of a majority of outstanding Shares of the Fund unless (i) the policy is
expressly deemed to be a fundamental policy or (ii) the policy is expressly
deemed to be changeable only by such majority vote. There can be no assurance
that the investment objective of the Fund will be achieved.
INVESTMENT OBJECTIVES AND POLICIES--UNDERLYING FUNDS
BB&T Equity Funds
BB&T Growth and Income Stock Fund (the "BB&T Growth and Income Fund"). The BB&T
Growth and Income Fund's investment objective is to seek capital growth, current
income or both, primarily through investment in stocks. Under normal market
conditions, the BB&T Growth and Income Fund will invest at least 65% of its
total assets in stocks, which for this purpose may be either common stock,
preferred stock, warrants, or debt instruments that are convertible to common
stock.
Equity securities purchased by the BB&T Growth and Income Fund will be either
traded on a domestic securities exchange or quoted in the NASDAQ/NYSE system.
While some stocks may be purchased primarily to achieve the BB&T Growth and
Income Fund's investment objective for income, most stocks will be purchased by
the BB&T Growth and Income Fund primarily in furtherance of its investment
objective for growth. The BB&T Growth and Income Fund will favor stocks of
issuers which over a given year period have achieved cumulative income in excess
of the cumulative dividends paid to shareholders.
Stocks such as those in which the BB&T Growth and Income Fund may invest are
more volatile and carry more risk than some other forms of investment. Depending
upon the performance of the BB&T Growth and Income Fund's investments, its net
asset value per share may decrease instead of increase.
BB&T Balanced Fund. The BB&T Balanced Fund's investment objective is to seek
long-term capital growth and to produce current income. The BB&T Balanced Fund
seeks to achieve this objective by investing in a broadly diversified portfolio
of securities, including common stocks, preferred stocks and bonds.
The portion of the BB&T Balanced Fund's assets invested in each type of security
will vary in accordance with economic conditions, the general level of common
stock prices, interest rates and other relevant considerations, including the
risks associated with each investment medium. Thus, although the BB&T Balanced
Fund seeks to reduce the risks associated with any one investment medium by
utilizing a variety of investments, performance will depend upon the additional
factors of timing and the ability of BB&T to judge and react to changing market
conditions. The BB&T Balanced Fund may invest in short-term obligations in order
to acquire interest income combined with liquidity. For temporary defensive
purposes, as determined by BB&T, these investments may constitute 100% of the
BB&T Balanced Fund's portfolio and, in such circumstances, will constitute a
temporary suspension of the BB&T Balanced Fund's attempt to achieve its
investment objective.
The BB&T Balanced Fund's equity securities will generally consist of common
stocks but may also consist of other equity-type securities such as warrants,
preferred stocks and convertible debt instruments. The Fund's equity investments
will be in companies with a favorable outlook and which are believed by BB&T to
be undervalued.
<PAGE>
The BB&T Balanced Fund's debt securities will consist of securities such as
bonds, notes, debentures and money market instruments. The BB&T Balanced Fund
may also invest in collateralized mortgage obligations ("CMOs"). The average
dollar-weighted maturity of debt securities held by the BB&T Balanced Fund will
vary according to market conditions and interest rate cycles and will range
between 1 year and 30 years under normal market conditions.
It is a fundamental policy of the BB&T Balanced Fund that it will invest at
least 25% of its total assets in fixed-income senior securities. For this
purpose, fixed-income senior securities include debt securities, preferred stock
and that portion of the value of securities convertible into common stock,
including convertible preferred stock and convertible debt, which is
attributable to the fixed-income characteristics of those securities.
BB&T Small Company Growth Fund. The BB&T Small Company Growth Fund's investment
objective is to seek long-term capital appreciation through investment primarily
in a diversified portfolio of equity and equity-related securities of small
capitalization growth companies. The BB&T Small Company Growth Fund will invest
in companies that are considered to have favorable and above average earnings
growth prospects and, as a matter of fundamental policy, at least 65% of its
total assets will be invested in small companies with a market capitalization
under $1 billion at the time of purchase. In making portfolio investments, the
BB&T Small Company Growth Fund will assess characteristics such as financial
condition, revenue, growth, profitability, earnings per share growth and trading
liquidity. The remainder of its assets, if not invested in the securities of
small companies, will be invested in the instruments described below and under
"Investment Techniques and Risk Factors."
Smaller, less seasoned companies may be subject to greater business risk than
larger, established companies. They may be more vulnerable to changes in
economic conditions, specific industry conditions, market fluctuations and other
factors affecting the profitability of companies. Therefore, the stock price of
smaller capitalization companies may be subject to greater price fluctuations
than that of larger, established companies. Due to these and other risk factors,
the price movement of the securities held by this Underlying BB&T Fund may be
volatile and the net asset value of a share may fluctuate more than that of a
share of a fund that invests in larger established companies.
BB&T International Equity Fund. The BB&T International Equity Fund's investment
objective is to seek long-term capital appreciation through investment primarily
in equity securities of foreign issuers. During normal market conditions, the
BB&T International Equity Fund will normally invest at least 80%, and, in any
event, at least 65%, of the value of its total assets in equity securities.
Equity securities include common stock and preferred stock (including
convertible preferred stock), bonds, notes and debentures convertible into
common or preferred stock; stock purchase warrants and rights; equity interests
in trusts and partnerships; and depository receipts of companies.
During normal market conditions, the BB&T International Equity Fund will
normally invest at least 90%, and, in any event, at least 65%, of the value of
its total assets in securities of foreign issuers. It will pursue investments in
non-dollar denominated stocks primarily in countries included the Morgan Stanley
Capital International EAFE (Europe, Australia, Far East) Index (the "EAFE
Index") and may also invest its assets in countries with emerging economies or
securities markets. This Underlying BB&T Fund will be diversified across
countries, industry groups and companies with investment at all times in at
least three foreign countries.
<PAGE>
When choosing securities, a value investment style is employed so that the
investment sub-adviser targets equity securities that are believed to be
undervalued. The investment sub-adviser will emphasize stocks with
price/earnings ratios below average for a security's earnings trend and its
price momentum will also be factors considered in security selection. The
investment sub-adviser will also consider macroeconomic factors such as the
prospects for relative economic growth among certain foreign countries, expected
levels of inflation, government policies influencing business conditions, and
the outlook for currency relationships.
BB&T Income Funds
BB&T Short-Intermediate U.S. Government Income Fund (the "BB&T
Short-Intermediate Fund") and BB&T Intermediate U.S. Government Bond Fund (the
"BB&T Intermediate Bond Fund"). The investment objective of the BB&T
Short-Intermediate Fund and the BB&T Intermediate Bond Fund is to seek current
income consistent with the preservation of capital. The BB&T Short-Intermediate
Fund will invest primarily in securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, some of which may be subject to
repurchase agreements, or in high grade CMOs. At least 65% of the BB&T
Short-Intermediate Fund's assets will be invested in such U.S. Government
securities. The dollar-weighted average portfolio maturity of the BB&T
Short-Intermediate Fund will be from two to five years. The BB&T Intermediate
Bond Fund will also invest primarily in such U.S. Government securities, and at
least 65% of its total assets will be invested in bonds. Bonds for this purpose
will include both bonds (maturities of ten years or more) and notes (maturities
of one to ten years) of the U.S. Government. The dollar-weighted average
portfolio maturity of the BB&T Intermediate Bond Fund will be from five to ten
years. CMOs will be considered bonds for this purpose if their expected average
life is comparable to the maturity of other bonds eligible for purchase by the
BB&T Income Funds. The BB&T Income Funds may also invest in short-term
obligations, commercial bonds and the shares of other investment companies.
Bonds, notes, and debentures in which the BB&T Income Funds may differ in
interest rates, maturates and times of issuance. Mortgage-related securities
purchased by the BB&T Income Funds will be either (i) issued by U.S.
Government-owned or sponsored corporations or (ii) rated in the highest category
by a nationally recognized statistical rating organization ("NRSRO") at the time
of purchase, (for example, rated Aaa by Moody's Investors Service, Inc.
("Moody's") or AAA by Standard & Poor's Ratings Services ("S&P"), or, if not
rated, are of comparable quality as determined by BB&T. The applicable ratings
are described in the Appendix to the Statement of Additional Information.
BB&T Money Fund
BB&T U.S. Treasury Money Market Fund (the "BB&T U.S. Treasury Fund"). The
investment objective of the BB&T U.S. Treasury Fund is to seek current income
with liquidity and stability of principal through investing exclusively in
short-term U.S. dollar-denominated obligations issued or guaranteed by the U.S.
Treasury, some of which may be subject to repurchase agreements.
All instruments in which the BB&T U.S. Treasury Fund invests are valued based on
the amortized cost valuation technique pursuant to Rule 2a-7 under the
Investment Company Act of 1940 (the "1940 Act"). All instruments in which the
Fund invests will have remaining maturities of 397 days or less, although
instruments subject to repurchase agreements and certain variable or floating
rate obligations may bear longer maturities. The dollar-weighted average
maturity of the securities in the BB&T U.S. Treasury Fund will not exceed 90
days. Obligations purchased by the BB&T U.S. Treasury Fund are limited to U.S.
dollar-denominated obligations which BB&T, pursuant to guidelines established by
the Board of Trustees of the Group has determined present minimal credit risks.
See "VALUATION OF SHARES" herein and the Statement of Additional Information for
further explanation of the amortized cost valuation method.
<PAGE>
INVESTMENT TECHNIQUES AND RISK FACTORS
Like any investment program, an investment in a Fund entails certain risks. The
Share price of the Fund will fluctuate in response to changes in the share price
of one or more of the Underlying Funds, which are permitted to engage in a wide
range of investment techniques.
U.S. Government Obligations
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as the Government National Mortgage Association, are supported by the full
faith and credit of the U.S. Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the right of the issuer to
borrow from the Treasury; others, such as those of the Student Loan Marketing
Association, are supported by the discretionary authority of the U.S. Government
to purchase the agency's obligations; still others, such as those of the Federal
Farm Credit Bureau or the Federal Home Loan Mortgage Corporation, are supported
only by the credit of the instrumentality. The BB&T U.S. Treasury Fund may
invest in U.S. Government securities to the extent that they are obligations
issued or guaranteed by the U.S. Treasury. No assurance can be given that the
U.S. Government would provide financial support to U.S. Government-sponsored
agencies or instrumentalities if it is not obligated to do so by law.
The Stripped Treasury Obligations in which the Funds may invest do not include
Certificates of Accrual on Treasury Securities ("CATS") or Treasury Income
Growth Receipts ("TIGRs"). Stripped securities are issued at a discount to their
"face value" and may exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest are
returned to investors.
The BB&T Short-Intermediate, BB&T Intermediate Bond, BB&T Growth and Income,
BB&T Balanced, and BB&T Small Company Growth Funds may also invest in "zero
coupon" U.S. Government securities. These securities tend to be more volatile
than other types of U.S. Government securities. Zero coupon securities are debt
instruments that do not pay current interest and are typically sold at prices
greatly discounted from par value. The return on a zero coupon obligation, when
held to maturity, equals the difference between the par value and the original
purchase price.
Mortgage-Related and Asset-Backed Securities
Investments in these and other derivative securities will not be made for
purposes of leverage or speculation, but rather primarily for conventional
investment or hedging purposes, liquidity, flexibility and to capitalize on
market inefficiencies. Consistent with its investment objective, restrictions
and policies, each of the Underlying Funds (except the BB&T International Equity
Fund) may invest in mortgage-related securities, which are securities
representing interests in "pools" of mortgages in which payments of both
interest and principal on the securities are made monthly.
<PAGE>
Early repayment of principal on mortgage-related securities may expose an
Underlying Fund to a lower rate of return upon reinvestment of principal. Like
other fixed-income securities, when interest rates rise, the value of a
mortgage-related security generally will decline; however, when interest rates
decline, the value of mortgage-related securities with prepayment features may
not increase as much as other fixed-income securities. For this and other
reasons, the stated maturity of a mortgage-related security may be shortened by
unscheduled prepayments on the underlying mortgages. Alternatively, the rate of
prepayments on underlying mortgages may have the effect of extending the
effective maturity of the security beyond what was anticipated at the time of
purchase. To the extent that unanticipated rates of prepayment on underlying
mortgages increase the effective maturity of a mortgage-related security, the
volatility of such security can be expected to increase. Accordingly, it may not
possible to predict accurately a security's return to a particular Underlying
Fund.
Like mortgages underlying mortgage-backed securities, automobile sales contracts
or credit card receivables underlying asset-backed securities are subject to
prepayment, which may reduce the overall return to certificate holders.
Nevertheless, principal prepayment rates tend not to vary much with interest
rates, and the short-term nature of the underlying car loans or other
receivables tends to dampen the impact of any change in the prepayment level.
Certificate holders may also experience delays in prepayment on the certificates
if the full amounts due on underlying sales contracts or receivables are not
realized because of unanticipated legal or administrative costs of enforcing the
contracts or because of depreciation or damage to the collateral (usually
automobiles) securing certain contracts, or other factors. In certain market
conditions, asset-backed securities may experience volatile fluctuations in
value and periods of illiquidity. If consistent with its investment objective
and policies, an Underlying Fund may invest in other asset-backed securities
that may be developed in the future.
The Underlying Funds (except the BB&T U.S. Treasury Fund and the BB&T
International Equity Fund) may invest in CMOs, which may include stripped
mortgage securities. Such securities are derivative multi-class mortgage
securities issued by agencies or instrumentalities of the U.S. Government, or by
private originators of, or investors in, mortgage loans, including savings and
loan associations, mortgage banks, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. Stripped mortgage securities are
usually structured with two classes that receive different proportions of the
interest and principal distributions on a pool of mortgage assets. A common type
of stripped mortgage security will have one class receiving all of the interest
from the mortgage assets (the interest-only or "IO" class), while the other
class will receive all of the principal (the principal-only or "PO" class). The
yield to maturity on an IO class is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying mortgage assets, and
a rapid rate of principal payments may have a material adverse effect on the
securities' yield to maturity. Generally, the market value of the PO class is
unusually volatile in response to changes in interest rates. If the underlying
mortgage assets experience greater than anticipated prepayments of principal, a
Fund or an Underlying Fund may fail to fully recoup its initial investment in
these securities even if the security is rated in the highest rating category.
Certain issuers of asset-backed securities are considered to be investment
companies under the Investment Company Act of 1940 (the "1940 Act"). The Funds
and Underlying Funds intend to conduct their operations so that they will invest
their assets (when combined with investments in securities of other investment
companies, if any) in the obligations of such issuers within applicable
regulatory limits.
<PAGE>
Bankers' Acceptances
The Underlying Funds may invest in bankers' acceptances guaranteed by domestic
and foreign banks if at the time of investment the guarantor bank has capital,
surplus, and undivided profits in excess of $100,000,000 (as of the date of its
most recently published financial statements).
Certificates of Deposit and Time Deposits
The Underlying Funds may invest in certificates of deposit and time deposits of
domestic and foreign banks and savings and loan associations if (a) at the time
of investment the depository institution has capital, surplus, and undivided
profits in excess of $100,000,000 (as of the date of its most recently published
financial statements), or (b) the principal amount of the instrument is insured
in full by the Federal Deposit Insurance Corporation.
The Money Market Fund and Underlying Qualivest Funds may also invest in
Eurodollar Certificates of Deposit ("ECDs"), which are U.S. dollar denominated
certificates of deposit issued by offices of foreign and domestic banks located
outside the U.S.; European Time Deposits ("ETDs"), which are U.S. dollar
denominated deposits in a foreign branch of a U.S. bank or a foreign bank;
Canadian Time Deposits ("CTDs"), which are essentially the same as ETDs, except
they are issued by Canadian offices of major Canadian banks; and Yankee CDs,
which are certificates of deposit issued by a U.S. branch of a foreign bank
denominated in U.S. dollars and held in the U.S.
Commercial Paper
Each of the Underlying Funds (except for the BB&T U.S. Treasury Fund) may,
within the limitations described above, invest in short-term promissory notes
(including variable amount master demand notes) issued by corporations and other
entities, such as municipalities, rated at the time of purchase within the two
highest categories assigned by an NRSRO (e.g., A-2 or better by S&P, Prime-2 or
better by Moody's or F-2 or better by Fitch Investors Service) or, if not rated,
determined to be of comparable quality to instruments that are so rated. The
BB&T Growth and Income Fund, and BB&T Small Companies Growth Fund may also
invest in Canadian Commercial Paper, which is commercial paper issued by a
Canadian corporation or a Canadian counterpart of a U.S. corporation, and in
Europaper, which is U.S. dollar denominated commercial paper of a foreign
issuer.
Each of the Underlying Funds (except the BB&T U.S. Treasury Fund) may invest in
variable amount master demand notes, which are unsecured demand notes that
permit the indebtedness thereunder to vary, and that provide for periodic
adjustments in the interest rate according to the terms of the instrument.
Although there is no secondary market in the notes, the Funds and the Underlying
Funds may demand payment of principal and accrued interest at any time. While
the notes are not typically rated by credit rating agencies, issuers of variable
amount master demand notes (which are normally manufacturing, retail, financial,
and other business concerns) must satisfy the same criteria as set forth above
for commercial paper. BB&T and any sub-adviser each will consider the earning
power, cash flow, and other liquidity ratios of the issuers of such notes and
will continuously monitor their financial status and ability to meet payment on
demand. A note will be deemed to have a maturity equal to the period of time
remaining until the principal amount can be recovered from the issuer through
demand. The period of time remaining until the principal amount can be recovered
under a variable master demand note shall not exceed seven days.
<PAGE>
Put and Call Options
The BB&T Small Company Growth Fund, and the BB&T International Equity Fund may
purchase put and call options on securities. The BB&T International Equity Fund
may purchase put and call options on foreign currencies, subject to its
applicable investment policies, for the purposes of hedging against market risks
related to its portfolio securities and adverse movements in exchange rates
between currencies, respectively. The BB&T International Equity Fund may also
engage in writing covered call options (options on securities or currencies
owned by that Underlying Fund). When a portfolio security or currency subject to
a call option is sold, an underlying Fund will effect a "closing purchase
transaction"--the purchase of a call option on the same security or currency
with the same exercise price and expiration date as the call option which such
Underlying Fund previously has written. If the Underlying Fund is unable to
effect a closing purchase transaction, it will not be able to sell the
underlying security or currency until the option expires or the Underlying Fund
delivers the underlying security or currency upon exercise. In addition, upon
the exercise of a call option by the holder thereof, the Underlying Fund will
forego the potential benefit represented by market appreciation over the
exercise price. Under normal conditions, it is not expected that any Underlying
Fund will cause the underlying value of portfolio securities and/or currencies
subject to such options to exceed 25% of its total assets. The BB&T Small
Company Growth Fund and the BB&T International Equity Fund will not purchase put
and call options when the aggregate premiums on outstanding options exceed 5% of
its net assets at the time of purchase.
The BB&T International Equity Fund, as part of its option transactions, also may
purchase index put and call options and write index options. As with options on
individual securities, the BB&T International Equity Fund or Underlying Fund
will write only covered index call options. Options on securities indices are
similar to options on a security except that, rather than the right to take or
make delivery of a security at a specified price, an option on a securities
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the securities index upon which the
option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option.
Price movements in securities which an Underlying Fund owns or intends to
purchase may not correlate perfectly with movements in the level of an index
and, therefore, an Underlying Fund bears the risk of a loss on an index option
that it not completely offset by movements in the price of such securities.
Because index options are settled in cash, a call writer cannot determine the
amount of its settlement obligations in advance and, unlike call writing on
specific securities, cannot provide in advance for, or cover, its potential
settlement obligations by acquiring and holding the underlying securities. An
Underlying Fund will segregate assets or otherwise cover index options that
would require it to pay cash upon exercise.
Foreign Securities
Investment in foreign securities is subject to special investment risks that
differ in some respects from those related to investments in securities of U.S.
domestic issuers. Such risks include political, social or economic instability
in the country of the issuer, the difficulty of predicting international trade
patterns, the possibility of the imposition of exchange controls, expropriation,
limits on removal of currency or other assets, nationalization of assets,
foreign withholding and income taxation, and foreign trading practices
(including higher trading commissions, custodial charges and delayed
settlements). Such securities may be subject to greater fluctuations in price
than securities issued by U.S. corporations or issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. The markets on which such
<PAGE>
securities trade may have less volume and liquidity, and may be more volatile
than securities markets in the U.S. In addition, there may be less publicly
available information about a foreign company than about a U.S. domiciled
company. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
U.S. domestic companies. There is generally less government regulation of
securities exchanges, brokers and listed companies abroad than in the U.S.
Confiscatory taxation or diplomatic developments could also affect investment in
those countries. In addition, foreign branches of U.S. banks, foreign banks and
foreign issuers may be subject to less stringent reserve requirements and to
different accounting, auditing, reporting, and recordkeeping standards than
those applicable to domestic branches of U.S. banks and U.S. domestic issuers.
If a security is denominated in foreign currency, the value of the security to
the Growth and Income Fund an Underlying Fund will be affected by changes in
currency exchange rates and in exchange control regulations, and costs will be
incurred in connection with conversions between currencies. Currency risks
generally increase in lesser developed markets. Exchange rate movements can be
large and can endure for extended periods of time, affecting either favorably or
unfavorably the value of the Underlying Fund's assets.
For many foreign securities, U.S. dollar denominated American Depositary
Receipts ("ADRs"), which are traded in the United States on exchanges or
over-the-counter, are issued by domestic banks. ADRs represent the right to
receive securities of foreign issuers deposited in a domestic bank or a
correspondent bank. ADRs do not eliminate all the risk inherent in investing in
the securities of foreign issuers' stock. However, by investing in ADRs rather
than directly in foreign issuers' stock, the Underlying Funds can avoid currency
risks during the settlement period for either purchase or sales.
The BB&T Balanced Fund, the BB&T Growth and Income Fund and the BB&T Small
Company Growth Fund may invest in foreign securities through the purchase of
ADRs or the purchase of securities on the New York Stock Exchange, Inc.
("NYSE"). However, the BB&T Growth and Income Fund and the BB&T Balanced Fund
will not do so if immediately after a purchase and as a result of the purchase
the total value of such foreign securities owned by such Underlying Fund would
exceed 25% of the value of its total assets.
From time to time the BB&T International Equity Fund may invest more than 25% of
its total assets in the securities of issuers located in Japan. Investments of
25% of more of the BB&T International Equity Fund's total assets in this or any
other country will make this Underlying Fund's performance more dependent upon
the political and economic circumstances of a particular country than a mutual
fund that is more widely diversified among issuers in different countries. For
example, in the past events, in the Japanese economy as well as social
developments and natural disasters have affected Japanese securities and
currency markets, and have periodically disrupted the relationship of the
Japanese yen with other currencies and with the U.S. dollar.
The BB&T International Equity Fund may invest in both sponsored and unsponsored
ADRs, and the BB&T International Equity Fund may invest in European Depository
Receipts ("EDRs"), Global Depository Receipts ("GDRs") and other similar global
instruments. EDRs, which are sometimes referred to as Continental Depository
Receipts, are receipts issued in Europe, typically by foreign banks and trust
companies, that evidence ownership of either foreign or domestic underlying
securities. GDRs are depository receipts structured like global debt issues to
facilitate trading on an international basis. Unsponsored ADR, EDR and GDR
programs are organized independently and without the cooperation of the issuer
of the underlying securities. As a result, available information concerning the
issuers may not be as current as for sponsored ADRs, EDRs, and GDRs, and the
prices of unsponsored depository receipts may be more volatile than if such
instruments were sponsored by the issuer.
<PAGE>
The BB&T International Equity Fund may invest its assets in countries with
emerging economies or securities markets. Political and economic structures in
many of these countries may be undergoing significant evolution and rapid
development, and these countries may lack the social, political and economic
stability characteristics of more developed countries. Some of these countries
may have in the past failed to recognize private property rights and have at
time nationalized or expropriated the assets of private companies. As a result,
the risks described above, including the risks of nationalization or
expropriation of assets, may be heightened. In addition, unanticipated political
or social developments may affect the value of investments in these countries
and the availability to the BB&T International Equity Fund of additional
investments in emerging market countries. The small size and inexperience of the
securities markets in certain of these countries and the limited volume of
trading in securities in these countries may make investments in the countries
illiquid and more volatile than investments in Japan or most Western European
countries. There may be little financial or accounting information available
with respect to issuers located in certain emerging market countries, and it may
be difficult as result to access the value or prospects of an investment in such
issuers. The BB&T International Equity Fund intends to limit its investment in
countries with emerging economies or securities markets to 20% of its total
assets.
Foreign Currency Transactions
The value of the assets of the BB&T International Equity Fund as measured in
U.S. dollars may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations, and such Underlying
Fund may incur costs in connection with conversions between various currencies.
The BB&T International Equity Fund will conduct its foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through forward contracts to purchase
or sell foreign currencies. A forward foreign currency exchange contract
("forward currency contract") involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These forward currency contracts are traded directly between
currency traders (usually large commercial banks) and their customers. The BB&T
International Equity Fund may enter into forward currency contracts in order to
hedge against adverse movements in exchange rates between currencies.
By entering into a forward currency contract in U.S. dollars for the purchase or
sale of the amount of foreign currency involved in an underlying security
transaction, the BB&T International Equity Fund is able to protect itself
against a possible loss between trade and settlement dates resulting from an
adverse change in the relationship between the U.S. dollar and such foreign
currency. However, this tends to limit potential gains which might result from a
positive change in such currency relationships. The BB&T International Equity
Fund may also hedge its foreign currency exchange rate risk by engaging in a
currency financial futures and options transactions. The forecasting of
short-term currency market movements is extremely difficult and whether such a
short-term heading strategy will be successful is highly uncertain.
<PAGE>
It is impossible to forecast with precision the market value of portfolio
securities at the expiration of a forward currency contract. Accordingly, it may
be necessary for the BB&T International Equity Fund to purchase additional
currency on the spot market if the market value of the security is less than the
amount of foreign currency such Underlying Fund is obligated to deliver when a
decision is made to sell the security and make delivery of the foreign currency
in settlement of a forward contract. Conversely, it may be necessary to sell on
the spot market some of the foreign currency received upon the sale of the
portfolio security if its market value exceeds the amount of foreign currency
such Underlying Fund is obligated to deliver.
If the BB&T International Equity Fund retains the portfolio security and engages
in an offsetting transaction, it will incur a gain or a lost to the extent that
there has been movement in forward currency contract prices. If the BB&T
International Equity Fund engages in an offsetting transaction, it may
subsequently enter into a new forward currency contract to sell the foreign
currency. Although such contracts tend to minimize the risk of loss due to a
decline in the value of the hedged currency, they also tend to limit any
potential gain which might result should the value of such currency increase.
The BB&T International Equity Fund will have to convert their holdings of
foreign currencies into U.S. dollars from time to time. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at which they are
buying and selling various currencies.
Repurchase Agreements
Securities held by an Underlying Fund may be subject to repurchase agreements.
Under the terms of a repurchase agreement, an Underlying Fund would acquire
securities from financial institutions, subject to the seller's agreement to
repurchase such securities at a mutually agreed upon date and price, which
includes interest negotiated on the basis of current short-term rates. The
seller under a repurchase agreement will be required to maintain at all times
the value of collateral held pursuant to the agreement at not less than the
repurchase price (including accrued interest). If a seller defaults on its
repurchase agreements, a Fund or an Underlying Fund may suffer a loss in
disposing of the security subject to the repurchase agreement. For further
information about repurchase agreements, see "INVESTMENT OBJECTIVES AND
POLICIES--Additional Information on Portfolio Instruments--Repurchase
Agreements" in the Statement of Additional Information.
Reverse Repurchase Agreements and Dollar Roll Agreements
Each Underlying Fund may borrow funds by entering into reverse repurchase
agreements. Pursuant to such reverse repurchase agreements, an Underlying Fund
would sell certain of its securities to financial institutions such as banks and
broker-dealers, and agree to repurchase them, at a mutually agreed upon date and
price. At the time an Underlying Fund enters into a reverse repurchase
agreement, it will place in a segregated custodial account assets such as U.S.
Government securities or other liquid securities consistent with its investment
restrictions having a value equal to the repurchase price (including accrued
interest), and will subsequently continually monitor the account to ensure that
such equivalent value is maintained at all times. Reverse repurchase agreements
involve the risk that the market value of securities to be purchased by an
Underlying Fund may decline below the price at which it is obligated to
repurchase the securities, or that the other party may default on its
obligation, so that an Underlying Fund is delayed or prevented from completing
the transaction.
<PAGE>
Futures Contracts
The BB&T Small Company Growth Fund and the BB&T International Equity Fund may
also enter into contracts for the future delivery of securities or foreign
currencies and futures contracts based on a specific security, class of
securities, foreign currency or an index, purchase or sell options on any such
futures contracts and engage in related closing transactions. A futures contract
on a securities index in an agreement obligating either party to pay, and
entitling the other party to receive, while the contract is outstanding, cash
payments based on the level of a specified securities index. Each of these
Underlying Funds may engage in such futures contracts in an effort to hedge
against market risks and to manage its cash position, but not for leveraging
purposes.
The value of each of the BB&T Small Company Growth and the BB&T International
Equity Funds' contracts may equal or exceed 100% of its total assets, although
each will not purchase or sell a futures contract unless immediately afterwards
the aggregate amount of margin deposits on its existing futures positions plus
the amount of premiums paid for related futures options entered into for other
than bona fide hedging purposes is 5% or less of its net assets. Futures
transactions will be limited to the extent necessary to maintain the
qualification of each Underlying Fund as a regulated investment company.
When-Issued and Delayed-Delivery Transactions
Each of the Underlying Funds (except the BB&T U.S. Treasury Fund) may purchase
securities on a when-issued or delayed-delivery basis. In addition, the BB&T
Small Company Growth Fund may sell, and the BB&T International Equity Fund may
purchase and sell, securities on a "forward commitment" basis. An Underlying
Fund will engage in when-issued and delayed-delivery transactions only for the
purpose of acquiring portfolio securities consistent with its investment
objective and policies, not for investment leverage. When-issued securities are
securities purchased for delivery beyond the normal settlement date at a stated
price and yield and thereby involve a risk that the yield obtained in the
transaction will be less than that available in the market when delivery takes
place. An Underlying Fund will not pay for such securities or start earning
interest on them until they are received. When an Underlying Fund agrees to
purchase such securities, its Custodian will set aside cash or liquid securities
equal to the amount of the commitment in a segregated account. In when-issued
and delayed-delivery transactions, an Underlying Fund relies on the seller to
complete the transaction; the seller's failure to do so may cause such
Underlying Fund to miss a price or yield considered to be advantageous.
Lending of Portfolio Securities
In order to generate additional income, the Underlying Funds may from time to
time lend portfolio securities to broker-dealers, banks or institutional
borrowers of securities. The Underlying Funds must receive 100% collateral, in
the form of cash or U.S. Government securities. This collateral must be valued
daily, and should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the lender. During the time
portfolio securities are on loan, the borrower pays the lender any dividends or
interest paid on such securities. Loans are subject to termination by the lender
or the borrower at any time. While a lending Fund or Underlying Fund does not
have the right to vote securities on loan, each lender intends to terminate the
loan and regain the right to vote if that is considered important with respect
to the investment. In the event the borrower defaults on its obligation to an
Underlying Fund, the lender could experience delays in recovering its securities
and possible capital losses. The Underlying Funds will only enter into loan
arrangements with broker-dealers, banks or other institutions determined to be
creditworthy under guidelines established by the relevant Board of Trustees that
permit the BB&T International Equity Fund to loan up to 33 1/3% of the value of
its total assets, and the remaining Underlying Funds to lend only up to 30% of
each such Underlying Fund's assets.
<PAGE>
Short-Term Obligations
The Underlying Funds (except the BB&T U.S. Treasury Fund) may invest in high
quality, short-term obligations (with maturities of 12 months or less) such as
domestic and foreign commercial paper (including variable amount master demand
notes), bankers' acceptances, certificates of deposit and demand and time
deposits of domestic and foreign branches of U.S. banks and foreign banks, and
repurchase agreements, in order to acquire interest income combined with
liquidity. Such investments will be limited to those obligations which, at the
time of purchase, (i) possess one of the two highest short-term ratings from
NRSROs or (ii) do not possess a rating (i.e., are unrated) but are determined to
be of comparable quality to rated instruments eligible for purchase. Under
normal market conditions, each of the eligible Underlying Funds will limit its
investment in short-term obligations to 35% of its total assets. Pending
investment or to meet anticipated redemption requests, the BB&T International
Equity Fund may also invest without limitation in short-term obligations. For
temporary defensive purposes, as determined by BB&T (or an Underlying Fund's
sub-adviser), these investments may constitute 100% of the Underlying Fund's
portfolio and, in such circumstances, will constitute a temporary suspension of
their attempts to achieve their investment objectives.
Short-Term Trading
In order to generate income, the Underlying Funds (except the BB&T U.S. Treasury
Fund) may engage in the technique of short-term trading. Such trading involves
the selling of securities held for a short time, ranging from several months to
less than a day. The object of such short-term trading is to increase the
potential for capital appreciation and/or income of the Underlying Funds in
order to take advantage of what BB&T (or an Underlying Fund's sub-adviser)
believes are changes in market, industry or individual company conditions or
outlook. Any such trading would increase the portfolio turnover rate of the
Funds and their transaction costs.
Securities Issued by Other Investment Companies
Each of the Underlying Funds (except the BB&T U.S. Treasury Fund) may invest up
to 10% of its total assets, and each of the Money Market Fund and the Qualivest
Money Funds may invest up to 25% of its total assets, in shares of money market
mutual funds for cash management purposes. In addition, the BB&T International
Equity Fund may purchase shares of investment companies investing primarily in
foreign securities, including so-called "country funds," which have portfolios
consisting exclusively of securities of issuers located in one country. An
Underlying Fund will incur additional expenses due to the duplication of expense
as a result of investing in other investment companies.
Restricted Securities
Securities in which the Underlying Funds may invest include securities issued by
corporations without registration under the Securities Act of 1933, as amended
(the "1933 Act"), in reliance on the so-called "private placement" exemption
from registration which is afforded by Section 4(2) of the 1933 Act ("Section
4(2) securities"). Section 4(2) securities are restricted as to disposition
under the federal securities laws, and generally are sold to institutional
investors such as the Underlying Funds who agree that they are purchasing the
securities for investment and not with a view to public distribution. Any resale
must also generally be made in an exempt transaction. Section 4(2) securities
are normally resold to other institutional investors through or with the
assistance of the issuer or investment dealers who make a market in such Section
4(2) securities, thus providing liquidity. Pursuant to procedures adopted by the
Board of Trustees of the Trust, BB&T, or a sub-adviser of an Underlying Fund may
determine Section 4(2) securities to be liquid if such securities are readily
marketable. These securities may include securities eligible for resale under
Rule 144A under the 1933 Act.
<PAGE>
VALUATION OF SHARES
The net asset value of the Fund is determined and its Shares are priced as of
the closing of the NYSE (generally 4:00 p.m. Eastern Time) on each Business Day
("Valuation Time"). As used herein, Business Day is a day on which the NYSE is
open for trading, and any other day except days on which there are insufficient
changes in the value of a Fund's portfolio securities to materially affect the
Fund's net asset value or days on which no Shares are tendered for redemption
and no order to purchase any Shares is received. Currently, the NYSE is closed
on the following holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas.
Net asset value per Share for purposes of pricing sales and redemptions is
calculated by dividing the value of all securities and other assets belonging to
the Fund, less the liabilities charged to the Fund and any liabilities allocable
to the Fund, by the number of the Fund's outstanding Shares. The net asset value
per Share of the Fund will fluctuate as the value of the investment portfolio of
the Fund changes.
The securities in the Fund will be valued at market value. For further
information about valuation of investments, see "NET ASSET VALUE" in the
Statement of Additional Information.
PURCHASING SHARES
As of the date of this Prospectus, Shares of the Funds are offered for purchase
by the Separate Account to serve as an investment medium for the Variable
Contracts issued by insurance companies, and to qualified pension and retirement
plans outside of the separate account context. Shares of the Funds may be
offered in the future to other separate accounts established by Hartford or sold
to separate accounts of other affiliated or unaffiliated insurance companies,
and may be offered in the future to serve as an investment medium for variable
life insurance policies.
While the Fund currently does not foresee any disadvantages to Variable Contract
Owners if the Fund serves as an investment medium for both variable annuity
contracts and variable life insurance policies, due to differences in tax
treatment or other considerations, it is theoretically possible that the
interest of owners of annuity contracts and insurance policies for which the
Fund served as an investment medium might at some time be in conflict. However,
the Trust's Board of Trustees and each insurance company with a separate account
allocating assets to the Fund would be required to monitor events to identify
any material conflicts between variable annuity contract owners and variable
life insurance policy owners, and would have to determine what action, if any
should be taken in the event of such a conflict. If such a conflict occurred, an
insurance company participating in the Fund might be required to redeem the
investment of one or more of its separate accounts from the Fund, which might
force the Funds to sell securities at disadvantageous prices.
<PAGE>
Shares of the Fund are purchased at the net asset value per Share (see
"VALUATION OF SHARES") next determined after receipt by the Distributor of an
order to purchase Shares. Purchases of Shares of the Fund will be effected only
on a Business Day of the Fund. An order received prior to a Valuation Time on
any Business Day will be executed at the net asset value determined as of the
next Valuation Time on the date of receipt. An order received after the final
Valuation Time on any Business Day will be executed at the net asset value
determined as of the next Valuation Time on the next Business Day of the Fund.
The Fund reserves the right to discontinue offering Shares at any time. In the
event that a Fund ceases offering its Shares, any investments allocated to the
Fund will, subject to any necessary regulatory approvals, be invested in another
fund of the Trust deemed appropriate by the Trustees.
REDEEMING SHARES
Shares may be redeemed without charge on any day that net asset value is
calculated (see "VALUATION OF SHARES"). All redemption orders are effected at
the net asset value per Share next determined after receipt by the Distributor
of a redemption request. Payment for Shares redeemed normally will be made
within seven days.
The Trust intends to pay cash for all Shares redeemed, but under abnormal
conditions which make payment in cash unwise, payment may be made wholly or
partly in portfolio securities at their then market value equal to the
redemption price. In such cases, a Shareholder may incur brokerage costs in
converting such securities to cash.
See the Statement of Additional Information ("ADDITIONAL PURCHASE AND REDEMPTION
INFORMATION") for examples of when the right of redemption may be suspended.
<PAGE>
Variable Contract Owners do not deal directly with the Funds to purchase or
redeem Shares, and Variable Contract Owners should refer to the prospectus for
the Separate Account for information on the allocation of premiums and on
transfers of accumulated value among sub-accounts of the Separate Account that
invests in the Fund.
MANAGEMENT OF THE FUND
Trustees
Overall responsibility for management of the Trust rests with its Board of
Trustees. The Trust will be managed by the Trustees in accordance with the laws
of the Commonwealth of Massachusetts governing business trusts. The Trustees, in
turn, elect the officers of the Trust to supervise its day-to-day operations.
Investment Adviser
Branch Banking and Trust Company, 434 Fayetteville Street Mall, Raleigh, N.C.
27601, is the investment adviser of the Fund and the Underlying BB&T Funds. BB&T
is the oldest bank in North Carolina. It is the principal bank affiliate of BB&T
Corporation, a bank holding company that is a North Carolina corporation,
headquartered in Winston-Salem, North Carolina. As of December 31, 1997, BB&T
Corporation had assets in excess of $29.2 billion. Through its subsidiaries,
BB&T Corporation operates over 425 banking offices in North Carolina, South
Carolina and Virginia, providing a broad range of financial services to
individuals and businesses.
In addition to general commercial, mortgage and retail banking services, BB&T
also provides trust, investment, insurance and travel services. BB&T has
provided investment management services through its Trust and Investment
Services Division since 1912. BB&T provides investment advisory services to the
Group and the Trust, and it has experience in managing collective investment
funds with investment portfolios and objectives comparable to those of the
Group, the Fund, and the Underlying Funds of the Trust. BB&T employs an
experienced staff of professional portfolio managers and traders who use a
disciplined investment process that focuses on maximization of risk-adjusted
investment returns. BB&T has managed common and collective investment funds for
its fiduciary accounts for more than 16 years and currently manages assets of
more than $3.37 billion.
Subject to the general supervision of the Group's Board of Trustees and in
accordance with the investment objectives and restrictions of the Fund, BB&T
(and, with respect to the BB&T Small Company Growth Fund and the BB&T
International Equity Fund, the sub-advisers discussed below) manages the
Underlying Funds, makes decisions with respect to, and places orders for, all
purchases and sales of its investment securities, and maintains its records
relating to such purchases and sales.
<PAGE>
Under an investment advisory agreement between the Trust and BB&T, the Trust
pays BB&T an investment advisory fee, computed daily and payable monthly, at an
annual rate equal to the lessor of: (a) 0.25% of the Fund's average daily net
assets; or (b) such fee as may from time to time be agreed upon in writing by
the Trust and BB&T. As a Shareholder of an Underlying Fund, the Fund will also
indirectly bear its proportionate share of any investment advisory fees and
other expenses paid by the Underlying Fund. The ratios of operating expenses to
average daily net assets of the operational Underlying Funds for the period
ended September 30, 1996 were as follows: BB&T U.S. Treasury Fund -- 0.75%; BB&T
Growth and Income Fund -- 0.86%; BB&T Intermediate Bond Fund -- 0.87%; BB&T
Balanced Fund -- 0.95%; BB&T Short-Intermediate Fund -- 0.93%; and BB&T Small
Company Growth Fund -- 1.79%. The ratio of estimated operating expenses to
average daily net assets of the BB&T International Equity Fund, which had not
commenced operations as of September 30, 1996, is 1.87%.
Under an investment advisory agreement between the Group and BB&T, the fee
payable to BB&T for investment advisory services provided to the Underlying
Funds is the lesser of: (a) a fee computed daily and paid monthly at the annual
rate of 0.40% of the BB&T U.S. Treasury Fund's average daily net assets; 0.60%
of each BB&T Income Funds' average daily net assets; 0.74% of the BB&T Growth
and Income Fund's and BB&T Balanced Fund's average daily net assets; and 1.00%
of the BB&T Small Company Growth Fund's and BB&T International Equity Fund's
average daily net assets; or (b) such fee as may from time to time be agreed
upon in writing by the Group and BB&T. A fee agreed to in writing from time to
time by the Group and BB&T may be significantly lower than the fee calculated at
the annual rate and the effect of such lower fee would be to lower the Fund's
expenses and increase the net income of the Fund during the period when such
lower fee is in effect.
For the fiscal year ended September 30, 1996, the Underlying Funds paid the
following investment advisory fees: the BB&T U.S. Treasury Fund paid 0.40% of
its average daily net assets; each of the BB&T Short-Intermediate, BB&T
Intermediate Bond, BB&T Growth and Income, and BB&T Balanced Funds, after
voluntary fee reductions, paid 0.50% of its average daily net assets; and the
BB&T Small Company Growth Fund paid 1.00% of its average daily net assets. The
BB&T International Equity Fund had not commenced operations as of September 30,
1996.
The persons primarily responsible for the management of certain of the Fund and
the Underlying Funds (other than the BB&T Small Company Growth and BB&T
International Equity Funds which are managed by sub-advisers, described below),
as well as their previous business experience, are as follows:
<TABLE>
<S> <C>
Portfolio Manager Business Experience
Keith F. Karlawish Manager of the BB&T Intermediate Bond Fund and BB&T Short-Intermediate Fund
since September, 1994. From June, 1993 to September, 1994, Mr. Karlawish was
Assistant Manager of the BB&T Intermediate Bond Fund and the BB&T
Short-Intermediate Fund. From September, 1991 to June, 1993, Mr. Karlawish was
a Financial Analyst Team Leader for Branch Banking and Trust Co. Mr. Karlawish
earned a B.S. in Business Administration from the University of Richmond, and an
MBA from the University of North Carolina at Chapel Hill.
Richard B. Jones Manager of the Growth and Income Fund since inception, and BB&T Growth and
Income Fund since February 1, 1993. Since 1987, Mr. Jones has been a portfolio
manager in the BB&T Trust Division. He holds a B.S. in Business Administration
from Miami (Ohio) University and an MBA from Ohio State University.
David R. Ellis Manager of the Capital Manager Fund and BB&T Balanced Fund since inception of
each. Since 1986, Mr. Ellis has been a portfolio manager in the BB&T Trust
Division. He holds a B.S. degree in Business Administration from the University
of North Carolina at Chapel Hill.
</TABLE>
<PAGE>
BB&T Sub-Advisers. PNC Equity Advisors Company ("PNC"), a wholly owned
subsidiary of PNC Bank, N.A., serves as the investment sub-adviser to the BB&T
Small Company Growth Fund pursuant to a sub-advisory agreement with BB&T. Under
the sub-advisory agreement, PNC manages the BB&T Small Company Growth Fund,
selects investments and places all orders for purchases and sales of its
portfolio securities, subject to the general supervision of the Group's Board of
Trustees and BB&T and in accordance with the BB&T Small Company Growth Fund's
investment objective, policies and restrictions.
The person primarily responsible for the management of the BB&T Small Company
Growth Fund is William J. Wykle. Mr. Wykle has served as the Manager of the BB&T
Small Company Growth Fund since its inception. He has been Vice President and
Small Cap Growth Equity Fund portfolio manager for PNC Bank, N.A. since 1992. He
has been a portfolio manager at PNC Bank, N.A. and its predecessor, Provident
National Bank, since 1986. Mr. Wykle has also been an investment manager with
PNC since 1995 and has been the portfolio manager of the Compass Capital Funds_
Small Cap Growth Equity Portfolio since its inception.
PNC Bank, with offices located at 1600 Market Street, Philadelphia, Pennsylvania
19103, is a wholly owned indirect subsidiary of PNC Bank Corp. PNC Bank Corp., a
bank holding company headquartered in Pittsburgh, Pennsylvania, was the 13th
largest bank holding company in the United States based on total assets at
September 30, 1996. PNC Bank Corp. operates banking subsidiaries in
Pennsylvania, Delaware, Florida, Indiana, Kentucky, Massachusetts, New Jersey
and Ohio and conducts certain non-banking operations throughout the United
States. Its major businesses include consumer banking, corporate banking, real
estate banking, mortgage banking and asset management. With $104.5 billion in
discretionary assets under management and $310.9 billion of assets under
administration at September 30, 1996, PNC Bank Corp. is one of the largest bank
money managers as well as one of the largest institutional mutual fund managers
in the United States. Of such amounts at September 30, 1996, PNC Bank had $94
billion in discretionary assets under management and $132.1 billion in assets
under administration. In addition to asset management and trust services, PNC
Bank also provides a wide range of domestic and international commercial banking
and consumer banking services. PNC Bank's origins, and in particular its trust
administration services, date back to the mid-to-late 1800s.
<PAGE>
For its services and expenses incurred under the sub-advisory agreement, PNC
Bank is entitled to a fee, payable by BB&T. The fee is computed daily and paid
monthly at the following annual rates (as a percentage of the BB&T Small Company
Growth Fund's average daily net assets), which vary according to the level of
BB&T Small Company Growth Fund assets:
Fund Assets Annual Fee
Up to $50 million....................................... 0.50%
Next $50 million........................................ 0.45%
Over $100 million....................................... 0.40%
CastleInternational Asset Management Limited ("CastleInternational") serves as
the investment sub-adviser to the BB&T International Equity Fund pursuant to a
sub-advisory agreement with BB&T. Under the sub-advisory agreement,
CastleInternational manages the BB&T International Equity Fund, selects
investments and places all orders for purchases and sales of the its securities,
subject to the general supervision of the Group's Board of Trustees and BB&T and
in accordance with the BB&T International Equity Fund's investment objective,
policies and restrictions.
CastleInternational, formed in 1996, with its primary office at 7 Castle Street,
Edinburgh, Scotland, EH2 3AH, is an indirect wholly owned subsidiary of PNC Bank
Corp. As of September 30, 1996, CastleInternational had approximately $1.6
billion in discretionary assets under management, including three mutual fund
portfolios, one bank common trust fund and a tax exempt institutional portfolio.
For its services and expenses incurred under the sub-advisory agreement,
CastleInternational is entitled to a fee, payable by BB&T. The fee is computed
daily and paid quarterly at the following annual rates (as a percentage of the
BB&T International Equity Fund's average daily net assets), which vary according
to the level of BB&T International Equity Fund assets:
Fund Assets Annual Fee
Up to $50 million............................................ 0.50%
Next $50 million............................................. 0.45%
Over $100 million............................................ 0.40%
The person primarily responsible for the management of the BB&T International
Equity Fund is Gordon Anderson. Mr. Anderson has served as Managing and
Investment Director of CastleInternational Asset Management Limited since 1996.
Prior to joining CastleInternational, Mr. Anderson was the Investment Director
of Dunedin Fund Managers, Ltd. Mr. Anderson has served as the Portfolio Manager
for the Compass Capital Funds (SM) International Equity Portfolio since 1996.
<PAGE>
Administrator and Distributor
BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio 43219-3035, a division of
BISYS Group, Inc., is the administrator for the Fund, and also acts as the
Trust's principal underwriter and distributor.
The Administrator generally assists in all aspects of the Fund's administration
and operation. For expenses assumed and services provided as administrator
pursuant to its Management and Administration Agreement with the Trust, the
Administrator receives a fee from the Fund equal to the lesser of a fee,
computed daily and paid periodically, at the annual rate of 0.07% of the Fund's
average daily net assets, or such other fee as may be agreed upon from time to
time by the Trust and the Administrator. The Administrator may periodically
voluntarily reduce all or a portion of its administrative fee with respect to
the Fund to increase the net income of such Fund available for distribution as
dividends. The voluntary fee reduction will cause the yield of the Fund to be
higher than it would otherwise be in the absence of such a reduction.
The Distributor acts as agent for the Funds in the distribution of its Shares
and, in such capacity, advertises and pays the cost of advertising, office space
and its personnel involved in such activities. The Distributor serves in such
capacity without remuneration from the Fund.
Other Service Providers
BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio 43219-3035,
serves as the Trust's transfer agent and dividend disbursing agent and provides
certain accounting services for the Fund. BISYS Fund Services Ohio, Inc.
receives an annual fee of $14 per Variable Contract Owner account, subject to
certain minimum base fees, for its services as transfer agent, and, for its
services as fund accountant, BISYS Fund Services Ohio, Inc. receives a fee,
computed daily and paid periodically, at an annual rate equal to the greater of
0.01% of average daily net assets or $10,000. Coopers & Lybrand L.L.P. serves as
independent auditors for the Trust. Fifth Third Bank is the custodian for the
Fund. See "MANAGEMENT OF THE TRUST" in the Statement of Additional Information
for further information.
While BISYS Fund Services Ohio, Inc. is a distinct legal entity from BISYS (the
Trust's administrator and distributor), BISYS Fund Services Ohio, Inc. is
considered to be an affiliated person of BISYS under the 1940 Act due to, among
other things, the fact that BISYS Fund Services Ohio, Inc. is owned by
substantially the same persons that directly or indirectly own BISYS.
Variable Contract Owner Servicing Agents
The Trust has adopted a plan under which up to 0.25% of the Fund's average daily
net assets may be expended to procure Variable Contract Owner services. Pursuant
to agreements with the Fund, certain financial institutions and their affiliates
may serve as Variable Contract Owner Servicing Agents to the Fund. A Variable
Contract Owner Servicing Agent generally provides support services to its
clients who are Variable Contract Owners by establishing and maintaining
accounts and records, providing account information, arranging for bank wires,
responding to routine inquiries, forwarding Variable Contract Owner
communications, assisting in the processing of purchase, exchange and redemption
requests, and assisting Variable Contract Owners in changing account
designations and addresses. For expenses incurred and services provided, each
Variable Contract Owner Servicing Agent receives a fee from the Fund, computed
daily and paid monthly, at an annual rate of up to 0.25% of the average daily
net assets of the Fund allocable to Variable Contracts owned by customers of the
Variable Contract Owner Servicing Agent. A Variable Contract Owner Servicing
Agent may periodically waive all or a portion of its servicing fees with respect
to the Fund to increase the net income of the Fund available for distribution as
dividends.
<PAGE>
Expenses
BB&T and the Administrator each bear all expenses in connection with the
performance of its services other than the cost of securities (including
brokerage commissions) purchased for the Trust. The Fund will bear the following
expenses relating to its operation: taxes, interest, fees of the Trustees of the
Trust, Securities and Exchange Commission fees, outside auditing and legal
expenses, advisory and administration fees, fees and out-of-pocket expenses of
the Custodian and fund accountant, certain insurance premiums, costs of
maintenance of the Trust's existence, costs of Shareholders' reports and
meetings, and any extraordinary expenses incurred in the Fund's operation.
Banking Laws
Federal banking laws and regulations presently prohibit a national bank or any
affiliate thereof from sponsoring, organizing or controlling a registered
open-end investment company continuously engaged in the issuance of its shares,
and generally from underwriting, selling or distributing securities, such as
Shares of the Fund.
BB&T believes that it may perform advisory services for the Fund as described
herein and, provided that they do not engage in underwriting, selling or
distribution of the Fund's shares, its affiliates believe that they may perform
Variable Contract Owner servicing activities and may receive compensation
without violating federal banking laws and regulations.
In the event that, due to future events, BB&T is prohibited from acting as the
investment adviser of the Fund and the Underlying Funds, it is probable that the
Board of Trustees would either recommend to Shareholders the selection of
another qualified adviser or, if that course of action appeared impractical,
that the Fund and Underlying Funds be liquidated.
Year 2000
The services provided to the Fund by BB&T, BISYS, BISYS Fund Services, Inc., and
the Fund's other service providers (collectively, the "Service Providers") are
dependent on those Service Providers' computer systems. Many computer software
and hardware systems in use today cannot distinguish between the year 2000 and
the year 1900 because of the way dates are encoded and calculated (the "Year
2000 Issue"). The failure to make this distinction could have a negative impact
on the Service Providers' ability to handle securities trades, price securities,
and conduct general account services on behalf of the Fund. The Trust is working
with the Service Providers to take steps that are reasonably designed to address
the Year 2000 Issue with respect to computer systems relied on by the Fund. The
Trust has no reason to believe that these steps will not be sufficient to avoid
any material adverse impact on the Fund, although there can be no assurances.
The costs or consequences of an incomplete or an untimely resolution of the Year
2000 Issue are unknown to the Trust and the Service Providers at this time, but
could have a material adverse impact on the operations of the Fund and the
Service Providers.
<PAGE>
TAXATION
The Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). Accordingly, the Fund
generally will not be subject to federal income taxes to the extent that it
distributed on a timely basis its investment company taxable income and its net
capital gains.
To comply with regulations under section 817(h) of the Code, the Fund is
required to diversify its investments. Generally, the Fund will be required to
diversify its investments so that on the last day of each quarter of a calendar
year no more than 55% of the value of its total assets is represented by any one
investment, no more than 70% is represented by any two investments, no more than
80% is represented by any three investments, and no more than 90% is represented
by any four investments. For this purpose, securities of a given issuer
generally are treated as one investment, but each U.S. Government agency and
instrumentality is treated as a separate issuer. Any security issued,
guaranteed, or insured (to the extent so guaranteed or insured) by the U.S. or
an agency or instrumentality of the U.S. is treated as a security issued by the
U.S. Government or its agency or instrumentality, whichever is applicable.
Compliance with the diversification rules under Section 817(h) of the Code
generally will limit the ability of the Fund to invest greater than 55% of its
total assets in direct obligations of the U.S. Treasury (or any other issuer) or
to invest primarily in securities issued by a single agency or instrumentality
of the U.S. Government. If the Fund fails to meet the diversification
requirement under Section 817(h) of the Code, income with respect to Variable
Contracts invested in the Fund at any time during the calendar quarter in which
the failure occurred could become currently taxable to the owners of such
Variable Contracts and income for prior periods with respect to such contracts
also could be taxable, most likely in the year of the failure to achieve the
required diversification. Other adverse tax consequences could also ensue. If
the Fund failed to qualify as a regulated investment company, the results would
be substantially the same as a failure to meet the diversification requirements
under Section 817(h) of the Code.
The Treasury Department announced that it would issue future regulations or
rulings addressing the circumstances in which a variable contract owner's
control of the investments of the separate account may cause the contract owner,
rather than the insurance company, to be treated as the owner of the assets held
by the separate account. If the contract owner is considered the owner of the
securities underlying the separate account, income and gains produced by those
securities would be included currently in the contract owner's gross income. It
is not known what standards will be set forth in the regulations or rulings.
In the event that rules or regulations are adopted, there can be no assurance
that the Fund will be able to operate as currently described, or that the Trust
will not have to change Fund's investment objective or investment policies.
While the Fund's investment objective is fundamental and may be changed only by
a vote of a majority of its outstanding Shares, the investment policies of the
Fund may be modified as necessary to prevent any such prospective rules and
regulations from causing Variable Contract Owners to be considered the owners of
the Shares of the Fund.
Reference is made to the prospectus for the Separate Account and Variable
Contract for information regarding the federal income tax treatment of
distributions to the Separate Account. See "ADDITIONAL INFORMATION - Additional
Tax Information" in the Statement of Additional Information for more information
on taxes.
<PAGE>
GENERAL INFORMATION
Description of the Trust and Its Shares
The Trust was organized as a Massachusetts business trust in 1994 and currently
consists of four portfolios. Each Share represents an equal proportionate
interest in the Fund with other Shares of the Fund, and is entitled to such
dividends and distributions out of the income earned on the assets belonging to
the Fund as are declared at the discretion of the Trustees. Shares are without
par value. Shareholders are entitled to one vote for each dollar of value
invested and a proportionate fractional vote for any fraction of a dollar
invested. Shareholders will vote in the aggregate and not by portfolio except as
otherwise expressly required by law.
An annual or special meeting of Shareholders to conduct necessary business is
not required by the Trust's Declaration of Trust, the 1940 Act or other
authority except, under certain circumstances, to elect Trustees, amend the
Declaration of Trust, approve an investment advisory agreement and to satisfy
certain other requirements. To the extent that such a meeting is not required,
the Trust may elect not to have an annual or special meeting.
The Trust will call a special meeting of Shareholders for purposes of
considering the removal of one or more Trustees upon written request therefor
from Shareholders holding not less than 10% of the outstanding votes of the
Trust. At such a meeting, a quorum of Shareholders (constituting a majority of
votes attributable to all outstanding Shares of the Trust), by majority vote,
has the power to remove one or more Trustees. In accordance with current laws,
it is anticipated that an insurance company issuing a variable contract that
participates in the Fund will request voting instructions from variable contract
owners and will vote shares or other voting interests in the separate account in
proportion of the voting instructions received. The Separate Account and
qualified pension and retirement plans are currently the only Shareholders of
the Fund, although other separate accounts of Hartford, or of other insurance
companies, may become Shareholders in the future.
Performance Information
From time to time performance information for the Fund showing its average
annual total return, aggregate total return and/or yield may be presented in
advertisements, sales literature and shareholder reports. Such performance
figures are based on historical earnings and are not intended to indicate future
performance. Average annual total return of the Fund will be calculated for the
period since the establishment of the Fund. Average annual total return is
measured by comparing the value of an investment in the Fund at the beginning of
the relevant period to the redemption value of the investment at the end of the
period (assuming immediate reinvestment of any dividends or capital gains
distributions and analyzing the result). Aggregate total return is calculated
similarly to average annual total return except that the return figure is
aggregated over the relevant period instead of annualized. Yield of the Fund
will be computed by dividing the net investment income per Share earned during a
recent one-month period by the per Share maximum offering price (reduced by any
undeclared earned income expected to be paid shortly as a dividend) on the last
day of the period and analyzing the result. Performance information for the Fund
will not be advertised or included in sales literature unless accompanied by
comparable performance information for the Separate Account.
<PAGE>
In addition, from time to time the Fund may present its respective distribution
rates in supplemental sales literature which is accompanied or preceded by a
prospectus and in Shareholder reports. Distribution rates will be computed by
dividing the distribution per Share made by the Fund over a twelve-month period
by the maximum offering price per Share. The calculation of income in the
distribution rate includes both income and capital gain dividends and does not
reflect unrealized gains or losses, although the Fund may also present a
distribution rate excluding the effect of capital gains. The distribution rate
differs from the yield, because it includes capital gains which are often
non-recurring in nature, whereas yield does not include such items.
Total return and yield are functions of the type and quality of instruments held
in the portfolio, operating expenses, and market conditions. Consequently, total
return and yield will fluctuate and are not necessarily representative of future
results. Quotations of yield or total return for the Fund will not take into
account charges or deductions against any Separate Account to which the Fund's
Shares are sold or Variable Contract specific deductions for cost of insurance
charges, premium load, administrative fees, maintenance fees, premium tax,
mortality and expense risks, or other charges that may be incurred under a
Variable Contract for which the Fund serves as an underlying investment vehicle.
The Fund's yield and total return should not be compared with mutual funds that
sell their shares directly to the public since the figures provided do not
reflect charges against the Separate Account or the Variable Contracts.
Performance information for the Fund reflects only the performance of a
hypothetical investment in the Fund during the particular time period on which
the calculations are based. In addition, if BB&T, PNC, CastleInternational, or
BISYS voluntarily reduce all or a part of their respective fees, the total
return of the Fund will be higher than it would otherwise be in the absence of
such voluntary fee reductions.
Miscellaneous
Inquiries regarding the Trust may be directed in writing to the Trust at 3435
Stelzer Road, Columbus, Ohio 43219-3035, or by calling toll free (800) 257-5872.
No person has been authorized to give any information or to make any
representations not contained in this Prospectus in connection with the offering
made by this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Fund or
its Distributor. This Prospectus does not constitute an offering by the Fund or
by its Distributor in any jurisdiction in which such offering may not lawfully
be made.
<PAGE>
BB&T Growth and Income Fund
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
1-800-257-5872
Variable Insurance Funds (the "Trust") is an open-end management investment
company which currently comprises four separate diversified investment
portfolios, each with different investment objectives and policies. This
Prospectus describes one of those portfolios, the BB&T Growth and Income Fund
(the "Fund").
Additional information about the Trust and the Fund, contained in a Statement of
Additional Information dated May 1, 1998, as amended or supplemented, has been
filed with the Securities and Exchange Commission and is available upon request
without charge by writing to the Trust at its address or by calling the Trust at
the telephone number shown above. The Statement of Additional Information is
incorporated herein by reference.
The Fund currently sells its shares of beneficial interest ("Shares") to a
segregated asset account ("Separate Account") of Hartford Life Insurance Company
("Hartford") to serve as the investment medium for variable annuity contracts
("Variable Contracts") issued by Hartford. Shares of the Fund also are sold to
qualified pension and retirement plans outside of the separate account context.
The Separate Account invests in shares of the Fund in accordance with allocation
instructions received from owners of the Variable Contracts ("Variable Contract
Owners"). Such allocation rights are described further in the Separate Account
prospectus.
Shares of the Fund are not deposits or obligations of, and are not endorsed,
insured or guaranteed by, any bank, the Federal Deposit Insurance Corporation,
or any other agency. An investment in the Fund involves investment risk,
including the possible loss of principal.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Investors should read this
Prospectus and retain it for future reference.
THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF THE
SEPARATE ACCOUNT. BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR
FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1998.
<PAGE>
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY
Shares Offered
Investment Objective
Investment Policies
Risk Factors and Special Considerations
Investment Adviser
Other Information
FUND EXPENSES
FINANCIAL HIGHLIGHTS
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE AND POLICIES
VALUATION OF SHARES
PURCHASING SHARES
REDEEMING SHARES
MANAGEMENT OF THE FUND
Trustees
Investment Adviser
Administrator and Distributor
Other Service Providers
Variable Contract Owner Servicing Agents
Expenses
Banking Laws
Year 2000
TAXATION
GENERAL INFORMATION
Description of the Trust and Its Shares
Performance Information
Miscellaneous
<PAGE>
PROSPECTUS SUMMARY
Shares Offered . . . . . . . . . . . . .Shares of the Fund, a diversified
investment portfolio of the Trust, a
Massachusetts business trust which is
registered as an open-end management
investment company. Shares of the Fund
may be offered in the future to other
separate accounts of Hartford, or to
separate accounts established by other
affiliated or unaffiliated insurance
companies, to serve as the underlying
investment medium for variable annuity
and variable life insurance contracts,
which may pose certain risks discussed
under "PURCHASING SHARES."
Investment Objective. . . . . . . . . The Fund seeks capital growth, current
income, or both.
Investment Policies. . . . . . . . . Under normal market conditions, the Fund
will invest at least 65% of its total
assets in stocks, which may include
common stock, preferred stock, warrants,
or debt instruments that are convertible
into common stock. See "INVESTMENT
OBJECTIVE AND POLICIES."
Risk Factors and Special
Considerations . . . . . . . . . . . . .An investment in the Fund involves a
certain amount of risk and may not be
suitable for all investors. See
"INVESTMENT TECHNIQUES AND RISK
FACTORS."
Investment Adviser . . . . . . . . . . Branch Banking and Trust Company
("BB&T"), Raleigh, North Carolina,
serves as investment adviser to the
Fund. See "MANAGEMENT OF THE FUND -
Investment Adviser."
Other Information . . . . . . . . . . . BISYS Fund Services ("BISYS" or
"Distributor" or "Administrator") serves
as the distributor and administrator of
the Fund. BISYS Fund Services Ohio, Inc.
("BISYS Ohio") serves as transfer agent
and dividend disbursing agent and
provides certain accounting services for
the Trust.
<PAGE>
FUND EXPENSES
The following expense table indicates costs and expenses that an investor should
anticipate incurring either directly or indirectly as a Shareholder of the Fund
during the current fiscal year. The information is based on expenses for the
Fund for the fiscal year ended December 31, 1997.
Annual Fund Operating Expenses
(as a percentage of average net assets annualized)
Management Fees After Waiver 1....................................0.36%
Other Expenses After Waiver and Reimbursements2...................0.55%
Total Fund Operating Expenses After Waivers and Reimbursements3...0.91%
- --------------------
1 BB&T has agreed to temporarily waive a portion of its investment
advisory fee for the Fund. Waived fees cannot be recovered at a future
date. Absent the advisory fee waiver, "Management Fees" as a percentage
of average daily net assets would have been 0.74% for the Fund. See
"MANAGEMENT OF THE FUND--Investment Adviser."
2 BISYS has agreed to temporarily waive a portion of its administrative
fees. Absent this waiver and expense reimbursements, "Other Expenses"
as a percentage of the Fund's average daily net assets would have been
1.57%.
3 Absent waivers and reimbursements, "Total Fund Operating Expenses" as a
percentage of average daily net assets would have been 2.31% for the
Fund.
The purpose of this table is to assist the prospective investor in understanding
the various costs and expenses that a Shareholder in the Fund will bear. The
following Example illustrates the expenses borne by Fund Shareholders.
Example*
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return, and (2) redemption at the end of each time period:
Expenses
1 Year ......................................................$ 9
3 Years......................................................$29
- ---------------
* This example should not be considered a representation of future
expenses, which may be more or less than those shown. The assumed 5%
annual return is hypothetical and should not be considered a
representation of past or future annual return. Actual return may be
greater or less than the assumed amount.
<PAGE>
FINANCIAL HIGHLIGHTS
The following table of selected financial information is included to assist
investors in evaluating the performance of the Fund since its commencement of
operations through December 31, 1997. This information has been audited by
Coopers & Lybrand L.L.P., the Trust's independent auditors, whose report on the
Fund's financial statements is included in the Fund's Annual Report, which may
be obtained without charge, and is incorporated by reference in the Trust's
Statement of Additional Information. The Annual Report also includes
Management's Discussion of Fund Performance. This information should be read in
conjunction with the Trust's financial statements relating to the Fund.
<TABLE>
<S> <C> <C>
June 3, 1997 through
For a Share outstanding throughout the period: December 31, 1997 (a)
---------------------------------------------
-----------------------
Net Asset Value, Beginning of Period $ 10.00
-----------------------
Investment Activities:
Net investment income 0.10
Net realized and unrealized gains from investments 1.89
-----------------------
Total from investment activities 1.99
-----------------------
Distributions:
From net investment income (0.10)
In excess of net investment income (0.01)
-----------------------
Total distributions (0.11)
-----------------------
Net Asset Value, End of Period $ 11.88
=======================
Total Return 19.96%(b)
Ratios/Supplementary Data:
Net assets, at end of period (000) $ 28,829
Ratio of expenses to average net assets 0.91%(c)
Ratio of net investment income to average net 1.68%(c)
assets
Ratio of expenses to average net assets* 2.31%(c)
Ratio of net investment income to average net 0.28%(c)
assets*
Portfolio turnover 7.75%
Average commission rate paid $ 0.0706(d)
</TABLE>
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Represents the dollar amount of commissions paid on portfolio transactions
divided by total number of shares purchased and sold by the Fund for which
commissions were charged.
* During the period, certain fees were reimbursed and voluntarily reduced. If
such reimbursements and voluntary fee reductions had not occurred, the
ratios would have been as indicated.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Shareholders should be aware that the investments made by the Fund at any given
time are not expected to be the same as those made by other mutual funds for
which BB&T acts as investment adviser, including mutual funds with names,
investment objectives and policies similar to the Fund. Investors should
carefully consider their investment goals and willingness to tolerate investment
risk before allocating their investment to the Fund.
The Fund's investment objective is to seek capital growth, current income, or
both. Under normal market conditions, the Fund will invest at least 65% of its
total assets in stocks, which for this purpose may be either common stock,
preferred stock, warrants, or debt instruments that are convertible to common
stock. The remainder of the Fund's assets, if not invested in stocks, will be
invested as described under "INVESTMENT TECHNIQUES AND RISK FACTORS."
Equity securities purchased by the Fund will be either traded on a domestic
securities exchange or quoted in the NASDAQ/NYSE system. While some stocks may
be purchased primarily to achieve the Fund's investment objective for income,
most stocks will be purchased by the Fund primarily in furtherance of its
investment objective for growth. The Fund will favor stocks of issuers which
over a five year period have achieved cumulative income in excess of the
cumulative dividends paid to shareholders.
The investment objective of the Fund is a fundamental policy and as such may not
be changed without a vote of the holders of a majority of the outstanding Shares
of the Fund. Other policies of the Fund may be changed without a vote of the
holders of a majority of outstanding Shares of the Fund unless (i) the policy is
expressly deemed to be a fundamental policy or (ii) the policy is expressly
deemed to be changeable only by such majority vote. There can be no assurance
that the investment objective of the Fund will be achieved.
INVESTMENT TECHNIQUES AND RISK FACTORS
Like any investment program, an investment in the Fund entails certain risks.
Put and Call Options
The Fund may purchase put and call options on securities, and may purchase put
and call options on foreign currencies, subject to its applicable investment
policies, for the purposes of hedging against market risks related to its
portfolio securities and adverse movements in exchange rates between currencies,
respectively. The Fund may also engage in writing covered call options (options
on securities or currencies owned by the Fund). When a portfolio security or
currency subject to a call option is sold, the Fund will effect a "closing
purchase transaction"--the purchase of a call option on the same security or
currency with the same exercise price and expiration date as the call option
which the Fund previously has written. If the Fund is unable to effect a closing
purchase transaction, it will not be able to sell the underlying security or
currency until the option expires or the Fund delivers the underlying security
or currency upon exercise. In addition, upon the exercise of a call option by
the holder thereof, the Fund will forego the potential benefit represented by
market appreciation over the exercise price. Under normal conditions, it is not
expected that the Fund will cause the underlying value of portfolio securities
and/or currencies subject to such options to exceed 25% of its total assets. The
Fund will not purchase put and call options when the aggregate premiums on
outstanding options exceed 5% of its net assets at the time of purchase.
<PAGE>
Futures Contracts
The Fund may also enter into contracts for the future delivery of securities or
foreign currencies and futures contracts based on a specific security, class of
securities, foreign currency or an index, purchase or sell options on any such
futures contracts and engage in related closing transactions. A futures contract
on a securities index is an agreement obligating either party to pay, and
entitling the other party to receive, while the contract is outstanding, cash
payments based on the level of a specified securities index. The Fund may engage
in such futures contracts in an effort to hedge against market risks and to
manage its cash position, but not for leveraging purposes.
The value of each of the Fund's contracts may equal or exceed 100% of its total
assets, although it will not purchase or sell a futures contract unless
immediately following such sale or purchase the aggregate amount of margin
deposits on its existing futures positions plus the amount of premiums paid for
related futures options entered into for other than bona fide hedging purposes
is 5% or less of the Fund's net assets. Futures transactions will be limited to
the extent necessary to maintain the qualification of the Fund as a regulated
investment company.
Foreign Securities
Investment in foreign securities is subject to special investment risks that
differ in some respects from those related to investments in securities of U.S.
domestic issuers. Such risks include political, social or economic instability
in the country of the issuer, the difficulty of predicting international trade
patterns, the possibility of the imposition of exchange controls, expropriation,
limits on removal of currency or other assets, nationalization of assets,
foreign withholding and income taxation, and foreign trading practices
(including higher trading commissions, custodial charges and delayed
settlements). Such securities may be subject to greater fluctuations in price
than securities issued by U.S. corporations or issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. The markets on which such
securities trade may have less volume and liquidity, and may be more volatile
than securities markets in the U.S. In addition, there may be less publicly
available information about a foreign company than about a U.S. domiciled
company. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
U.S. domestic companies. There is generally less government regulation of
securities exchanges, brokers and listed companies abroad than in the U.S.
Confiscatory taxation or diplomatic developments could also affect investment in
those countries. In addition, foreign branches of U.S. banks, foreign banks and
foreign issuers may be subject to less stringent reserve requirements and to
different accounting, auditing, reporting, and recordkeeping standards than
those applicable to domestic branches of U.S. banks and U.S. domestic issuers.
<PAGE>
If a security is denominated in foreign currency, the value of the security to
the Fund will be affected by changes in currency exchange rates and in exchange
control regulations, and costs will be incurred in connection with conversions
between currencies. Currency risks generally increase in lesser developed
markets. Exchange rate movements can be large and can endure for extended
periods of time, affecting either favorably or unfavorably the value of the
Fund's assets. For many foreign securities, U.S. dollar denominated American
Depositary Receipts ("ADRs"), which are traded in the United States on exchanges
or over-the-counter, are issued by domestic banks. ADRs represent the right to
receive securities of foreign issuers deposited in a domestic bank or a
correspondent bank. ADRs do not eliminate all the risk inherent in investing in
the securities of foreign issuers' stock. However, by investing in ADRs rather
than directly in foreign issuers' stock, the Fund can avoid currency risks
during the settlement period for either purchase or sales. The Fund may invest
in foreign securities through the purchase of ADRs or the purchase of securities
on the New York Stock Exchange, Inc. ("NYSE").
Unsponsored ADR programs are organized independently and without the cooperation
of the issuer of the underlying securities. As a result, available information
concerning the issuers may not be as current as for sponsored ADRs, and the
prices of unsponsored depository receipts may be more volatile than if such
instruments were sponsored by the issuer.
The value of the assets of the Fund as measured in U.S. dollars may be affected
favorably or unfavorably by changes in foreign currency exchange rates and
exchange control regulations.
U.S. Government Obligations
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as the Government National Mortgage Association, are supported by the full
faith and credit of the U.S. Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the right of the issuer to
borrow from the Treasury; others, such as those of the Student Loan Marketing
Association, are supported by the discretionary authority of the U.S. Government
to purchase the agency's obligations; still others, such as those of the Federal
Farm Credit Bureau or the Federal Home Loan Mortgage Corporation, are supported
only by the credit of the instrumentality. No assurance can be given that the
U.S. Government would provide financial support to U.S. Government-sponsored
agencies or instrumentalities if it is not obligated to do so by law.
The Stripped Treasury Obligations in which the Fund may invest do not include
Certificates of Accrual on Treasury Securities ("CATS") or Treasury Income
Growth Receipts ("TIGRs"). 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.
<PAGE>
The Fund may also invest in "zero coupon" U.S. Government securities. These
securities tend to be more volatile than other types of U.S. Government
securities. Zero coupon securities are debt instruments that do not pay current
interest and are typically sold at prices greatly discounted from par value. The
return on a zero coupon obligation, when held to maturity, equals the difference
between the par value and the original purchase price.
Mortgage-Related and Asset-Backed Securities
Investments in these and other derivative securities will not be made for
purposes of leverage or speculation, but rather primarily for conventional
investment or hedging purposes, liquidity, flexibility and to capitalize on
market inefficiencies. Consistent with its investment objective, restrictions
and policies, the Fund may invest in mortgage-related securities, which are
securities representing interests in "pools" of mortgages in which payments of
both interest and principal on the securities are made monthly.
Early repayment of principal on mortgage-related securities may expose the Fund
to a lower rate of return upon reinvestment of principal. Like other
fixed-income securities, when interest rates rise, the value of a
mortgage-related security generally will decline; however, when interest rates
decline, the value of mortgage-related securities with prepayment features may
not increase as much as other fixed-income securities. For this and other
reasons, the stated maturity of a mortgage-related security may be shortened by
unscheduled prepayments on the underlying mortgages. Alternatively, the rate of
prepayments on underlying mortgages may have the effect of extending the
effective maturity of the security beyond what was anticipated at the time of
purchase. To the extent that unanticipated rates of prepayment on underlying
mortgages increase the effective maturity of a mortgage-related security, the
volatility of such security can be expected to increase. Accordingly, it may not
be possible to predict accurately a security's return to the Fund.
Like mortgages underlying mortgage-backed securities, automobile sales contracts
or credit card receivables underlying asset-backed securities are subject to
prepayment, which may reduce the overall return to certificate holders.
Nevertheless, principal prepayment rates tend not to vary much with interest
rates, and the short-term nature of the underlying car loans or other
receivables tends to dampen the impact of any change in the prepayment level.
Certificate holders may also experience delays in prepayment on the certificates
if the full amounts due on underlying sales contracts or receivables are not
realized because of unanticipated legal or administrative costs of enforcing the
contracts or because of depreciation or damage to the collateral (usually
automobiles) securing certain contracts, or other factors. In certain market
conditions, asset-backed securities may experience volatile fluctuations in
value and periods of illiquidity. If consistent with its investment objective
and policies, the Fund may invest in other asset-backed securities that may be
developed in the future.
<PAGE>
The Fund may invest in Collateralized Mortgage Obligations. CMOs may include
stripped mortgage securities. Such securities are derivative multi-class
mortgage securities issued by agencies or instrumentalities of the U.S.
Government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. Stripped
mortgage securities are usually structured with two classes that receive
different proportions of the interest and principal distributions on a pool of
mortgage assets. A common type of stripped mortgage security will have one class
receiving all of the interest from the mortgage assets (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on the securities' yield to maturity. Generally,
the market value of the PO class is unusually volatile in response to changes in
interest rates. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment in these securities even if the security is rated in the
highest rating category.
Certain issuers of asset-backed securities are considered to be investment
companies under the Investment Company Act of 1940 (the "1940 Act"). The Fund
intends to conduct its operations so that it will invest its assets (when
combined with investments in securities of other investment companies, if any)
in the obligations of such issuers within applicable regulatory limits.
Bankers' Acceptances
The Fund may invest in bankers' acceptances guaranteed by domestic and foreign
banks if at the time of investment the guarantor bank has capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of its most recently
published financial statements).
Certificates of Deposit and Time Deposits
The Fund may invest in certificates of deposit and time deposits of domestic and
foreign banks and savings and loan associations if (a) at the time of investment
the depository institution has capital, surplus, and undivided profits in excess
of $100,000,000 (as of the date of its most recently published financial
statements), or (b) the principal amount of the instrument is insured in full by
the Federal Deposit Insurance Corporation.
Commercial Paper
The Fund may, within the limitations described above, invest in short-term
promissory notes (including variable amount master demand notes) issued by
corporations and other entities, such as municipalities, rated at the time of
purchase within the two highest categories assigned by a nationally recognized
statistical rating organization ("NRSRO") (e.g., A-2 or better by Standard &
Poor's Ratings Services ("S&P"), Prime-2 or better by Moody's Investors Service,
Inc. ("Moody's") or F-2 or better by Fitch Investors Service ("Fitch")) or, if
not rated, determined to be of comparable quality to instruments that are so
rated. The Fund may also invest in Canadian Commercial Paper, which is
commercial paper issued by a Canadian corporation or a Canadian counterpart of a
U.S. corporation, and in Europaper, which is U.S. dollar denominated commercial
paper of a foreign issuer.
<PAGE>
The Fund may invest in variable amount master demand notes, which are unsecured
demand notes that permit the indebtedness thereunder to vary, and that provide
for periodic adjustments in the interest rate according to the terms of the
instrument. Although there is no secondary market in the notes, the Fund may
demand payment of principal and accrued interest at any time. While the notes
are not typically rated by credit rating agencies, issuers of variable amount
master demand notes (which are normally manufacturing, retail, financial, and
other business concerns) must satisfy the same criteria as set forth above for
commercial paper. BB&T will consider the earning power, cash flow, and other
liquidity ratios of the issuers of such notes and will continuously monitor
their financial status and ability to meet payment on demand. A note will be
deemed to have a maturity equal to the period of time remaining until the
principal amount can be recovered from the issuer through demand. The period of
time remaining until the principal amount can be recovered under a variable
master demand note shall not exceed seven days.
Repurchase Agreements
Securities held by the Fund may be subject to repurchase agreements. Under the
terms of a repurchase agreement, the Fund would acquire securities from
financial institutions, subject to the seller's agreement to repurchase such
securities at a mutually agreed upon date and price, which includes interest
negotiated on the basis of current short-term rates. The seller under a
repurchase agreement will be required to maintain at all times the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest). If a seller defaults on its repurchase agreements,
the Fund may suffer a loss in disposing of the security subject to the
repurchase agreement. For further information about repurchase agreements, see
"INVESTMENT OBJECTIVES AND POLICIES--Additional Information on Portfolio
Instruments--Repurchase Agreements" in the Statement of Additional Information.
Reverse Repurchase Agreements and Dollar Roll Agreements
The Fund may also enter into dollar roll agreements in accordance with
applicable investment restrictions. Pursuant to such reverse repurchase
agreements, the Fund would sell certain of its securities to financial
institutions such as banks and broker-dealers, and agree to repurchase them, or
substantially similar securities in the case of a dollar roll agreement, at a
mutually agreed upon date and price. A dollar roll agreement is analogous to a
reverse repurchase agreement, with the Fund selling mortgage-backed securities
for delivery in the current month and simultaneously contracting to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. At the time the Fund enters into a reverse repurchase agreement or
dollar roll agreement, it will place in a segregated custodial account assets
such as U.S. Government securities or other liquid securities consistent with
its investment restrictions having a value equal to the repurchase price
(including accrued interest), and will subsequently continually monitor the
account to ensure that such equivalent value is maintained at all times. Reverse
repurchase agreements and dollar roll agreements involve the risk that the
market value of securities to be purchased by the Fund may decline below the
price at which it is obligated to repurchase the securities, or that the other
party may default on its obligation, so that the Fund is delayed or prevented
from completing the transaction.
<PAGE>
When-Issued and Delayed-Delivery Transactions
The Fund may purchase securities on a when-issued or delayed-delivery basis. In
addition, the Fund may sell securities on a "forward commitment" basis. The Fund
will engage in when-issued and delayed-delivery transactions only for the
purpose of acquiring portfolio securities consistent with its investment
objective and policies, not for investment leverage. When-issued securities are
securities purchased for delivery beyond the normal settlement date at a stated
price and yield and thereby involve a risk that the yield obtained in the
transaction will be less than that available in the market when delivery takes
place. The Fund will not pay for such securities or start earning interest on
them until they are received. When the Fund agrees to purchase such securities,
its Custodian will set aside in a segregated account cash or liquid securities
equal to the amount of the commitment. In when-issued and delayed-delivery
transactions, the Fund relies on the seller to complete the transaction; the
seller's failure to do so may cause the Fund to miss a price or yield considered
to be advantageous.
Lending of Portfolio Securities
In order to generate additional income the Fund may, from time to time, lend
portfolio securities to broker-dealers, banks or institutional borrowers of
securities. The Fund must receive 100% collateral, in the form of cash or U.S.
Government securities. This collateral must be valued daily, and should the
market value of the loaned securities increase, the borrower must furnish
additional collateral to the lender. During the time portfolio securities are on
loan, the borrower pays the lender any dividends or interest paid on such
securities. Loans are subject to termination by the lender or the borrower at
any time. While the Fund does not have the right to vote securities on loan, it
intends to terminate the loan and regain the right to vote if that is considered
important with respect to the investment. In the event the borrower defaults on
its obligation to the Fund, it could experience delays in recovering its
securities and possible capital losses. The Fund will only enter into loan
arrangements with broker-dealers, banks or other institutions determined to be
creditworthy under guidelines established by the relevant Board of Trustees that
permit the Fund to loan up to 33 1/3% of the value of its total assets.
<PAGE>
Short-Term Obligations
The Fund may invest in high quality, short-term obligations (with maturities of
12 months or less) such as domestic and foreign commercial paper (including
variable amount master demand notes), bankers' acceptances, certificates of
deposit and demand and time deposits of domestic and foreign branches of U.S.
banks and foreign banks, and repurchase agreements, in order to acquire interest
income combined with liquidity. Such investments will be limited to those
obligations which, at the time of purchase (i) possess one of the two highest
short-term ratings from NRSROs, or (ii) do not possess a rating (i.e., are
unrated) but are determined to be of comparable quality to rated instruments
eligible for purchase. Under normal market conditions, the Fund will limit its
investment in short-term obligations to 35% of its total assets. For temporary
defensive purposes, as determined by BB&T, these investments may constitute 100%
of the Fund's portfolio and, in such circumstances, will constitute a temporary
suspension of its attempts to achieve its investment objective.
Short-Term Trading
In order to generate income, the Fund may engage in the technique of short-term
trading. Such trading involves the selling of securities held for a short time,
ranging from several months to less than a day. The object of such short-term
trading is to increase the potential for capital appreciation and/or income of
the Fund in order to take advantage of what BB&T believes are changes in market,
industry or individual company conditions or outlook. Any such trading would
increase the portfolio turnover rate of the Fund and its transaction costs.
Securities Issued by Other Investment Companies
The Fund may invest up to 10% of its total assets in shares of money market
mutual funds for cash management purposes. The Fund will incur additional
expenses due to the duplication of expense as a result of investing in other
investment companies.
Restricted Securities
Securities in which the Fund may invest include securities issued by
corporations without registration under the Securities Act of 1933, as amended
(the "1933 Act"), in reliance on the so-called "private placement" exemption
from registration which is afforded by Section 4(2) of the 1933 Act ("Section
4(2) securities"). Section 4(2) securities are restricted as to disposition
under the federal securities laws, and generally are sold to institutional
investors such as the Fund which agree that they are purchasing the securities
for investment and not with a view to public distribution. Any resale must also
generally be made in an exempt transaction. Section 4(2) securities are normally
resold to other institutional investors through or with the assistance of the
issuer or investment dealers who make a market in such Section 4(2) securities,
thus providing liquidity. Pursuant to procedures adopted by the Board of
Trustees of the Trust, BB&T may determine Section 4(2) securities to be liquid
if such securities are readily marketable. These securities may include
securities eligible for resale under Rule 144A under the 1933 Act.
<PAGE>
VALUATION OF SHARES
The net asset value of the Fund is determined and its Shares are priced as of
the closing of the NYSE (generally 4:00 p.m. Eastern Time) on each Business Day
("Valuation Time"). As used herein, Business Day is a day on which the NYSE is
open for trading, and any other day except days on which there are insufficient
changes in the value of the Fund's portfolio securities to materially affect the
Fund's net asset value or days on which no Shares are tendered for redemption
and no order to purchase any Shares is received. Currently, the NYSE is closed
on the following holidays: New Year's Day, Martin Luther King, Jr. Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas.
Net asset value per Share for purposes of pricing sales and redemptions is
calculated by dividing the value of all securities and other assets belonging to
the Fund, less the liabilities charged to the Fund and any liabilities allocable
to the Fund, by the number of the Fund's outstanding Shares. The net asset value
per Share of the Fund will fluctuate as the value of the investment portfolio of
the Fund changes.
The securities in the Fund will be valued at market value. If market quotations
are not available, the securities will be valued by a method which the Board of
Trustees believes accurately reflects fair value. For further information about
valuation of investments, see "NET ASSET VALUE" in the Statement of Additional
Information.
PURCHASING SHARES
As of the date of this Prospectus, Shares of the Fund are offered for purchase
by the Separate Account to serve as an investment medium for the Variable
Contracts issued by Hartford, and to qualified pension and retirement plans
outside of the separate account context. Shares of the Fund may be offered in
the future to other separate accounts established by Hartford or sold to
separate accounts of other affiliated or unaffiliated insurance companies, and
may be offered in the future to serve as an investment medium for variable life
insurance policies.
While the Fund currently does not foresee any disadvantages to Variable Contract
Owners if the Fund serves as an investment medium for both variable annuity
contracts and variable life insurance policies, due to differences in tax
treatment or other considerations, it is theoretically possible that the
interest of owners of annuity contracts and insurance policies for which the
Fund served as an investment medium might at some time be in conflict. However,
the Trust's Board of Trustees and each insurance company with a separate account
allocating assets to the Fund would be required to monitor events to identify
any material conflicts between variable annuity contract owners and variable
life insurance policy owners, and would have to determine what action, if any,
should be taken in the event of such a conflict. If such a conflict occurred, an
insurance company participating in the Fund might be required to redeem the
investment of one or more of its separate accounts from the Fund, which might
force the Fund to sell securities at disadvantageous prices.
<PAGE>
Shares of the Fund are purchased at the net asset value per Share (see
"VALUATION OF SHARES") next determined after receipt by the Distributor of an
order to purchase Shares. Purchases of Shares of the Fund will be effected only
on a Business Day of the Fund. An order received prior to the Valuation Time on
any Business Day will be executed at the net asset value determined as of the
Valuation Time on the date of receipt. An order received after the Valuation
Time on any Business Day will be executed at the net asset value determined as
of the Valuation Time on the next Business Day of the Fund.
The Fund reserves the right to discontinue offering Shares at any time. In the
event that the Fund ceases offering its Shares, any investments allocated to the
Fund will, subject to any necessary regulatory approvals, be invested in another
fund of the Trust deemed appropriate by the Trustees.
REDEEMING SHARES
Shares may be redeemed without charge on any day that net asset value is
calculated (see "VALUATION OF SHARES"). All redemption orders are effected at
the net asset value per Share next determined after receipt by the Distributor
of a redemption request. Payment for Shares redeemed normally will be made
within seven days.
The Trust intends to pay cash for all Shares redeemed, but under abnormal
conditions which make payment in cash unwise, payment may be made wholly or
partly in portfolio securities at their then market value equal to the
redemption price. In such cases, a Shareholder may incur brokerage costs in
converting such securities to cash.
See the Statement of Additional Information ("ADDITIONAL PURCHASE AND REDEMPTION
INFORMATION") for examples of when the right of redemption may be suspended.
Variable Contract Owners do not deal directly with the Fund to purchase or
redeem Shares, and Variable Contract Owners should refer to the prospectus for
the Separate Account for information on the allocation of premiums and on
transfers of accumulated value among sub-accounts of the Separate Account that
invests in the Fund.
<PAGE>
MANAGEMENT OF THE FUND
Trustees
Overall responsibility for management of the Trust rests with its Board of
Trustees. The Trust will be managed by the Trustees in accordance with the laws
of the Commonwealth of Massachusetts governing business trusts. The Trustees, in
turn, elect the officers of the Trust to supervise its day-to-day operations.
Investment Adviser
Branch Banking and Trust Company, 434 Fayetteville Street Mall, Raleigh, N.C.
27601, is the investment adviser of the Growth and Income Fund. BB&T is the
oldest bank in North Carolina. It is the principal bank affiliate of BB&T
Corporation, a bank holding company that is a North Carolina corporation
headquartered in Winston-Salem, North Carolina. As of December 31, 1997, BB&T
Corporation had assets in excess of $29.2 billion. Through its subsidiaries,
BB&T Corporation operates over 425 banking offices in North Carolina, South
Carolina and Virginia, providing a broad range of financial services to
individuals and businesses.
In addition to general commercial, mortgage and retail banking services, BB&T
also provides trust, investment, insurance and travel services. BB&T has
provided investment management services through its Trust and Investment
Services Division since 1912. BB&T provides investment advisory services to the
BB&T Mutual Funds Group (the "Group") and the Trust, and it has experience in
managing collective investment funds with investment portfolios and objectives
comparable to those of the Group and the Fund. BB&T employs an experienced staff
of professional portfolio managers and traders who use a disciplined investment
process that focuses on maximization of risk-adjusted investment returns. BB&T
has managed common and collective investment funds for its fiduciary accounts
for more than 16 years and currently manages assets of more than $3.37 billion.
Under an investment advisory agreement between the Trust and BB&T, the Trust
pays BB&T an investment advisory fee, computed daily and payable monthly, at an
annual rate equal to the lessor of: (a) 0.74% of the Fund's average daily net
assets; or (b) such amount as may from time to time be agreed upon in writing by
the Trust and BB&T. For services provided and expenses assumed during the fiscal
period ended December 31, 1997, BB&T received an investment advisory fee from
the Fund at the annual rate of 0.36% of the Fund's average daily net assets.
Richard B. Jones is the person who has been primarily responsible for the
management of the Fund since its inception. Mr. Jones has been a portfolio
manager in the BB&T Trust Division since 1987. He holds a B.S. in Business
Administration from Miami (Ohio) University and an M.B.A. from Ohio State
University.
<PAGE>
Administrator and Distributor
BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio 43219-3035, a division of
BISYS Group, Inc., is the administrator for the Fund, and also acts as the
Trust's principal underwriter and distributor.
The Administrator generally assists in all aspects of the Fund's administration
and operation. For expenses assumed and services provided as administrator
pursuant to its Management and Administration Agreement with the Trust, the
Administrator receives a fee from the Fund equal to the lesser of an amount,
computed daily and paid periodically, at the annual rate of 0.20% of the Fund's
average daily net assets, or such other amount as may be agreed upon from time
to time by the Trust and the Administrator. The Administrator may periodically
voluntarily reduce all or a portion of its administrative fee with respect to
the Fund to increase the net income of the Fund available for distribution as
dividends. The voluntary fee reduction will cause the yield of the Fund to be
higher than it would otherwise be in the absence of such a reduction.
The Distributor acts as agent for the Fund in the distribution of its Shares
and, in such capacity, advertises and pays the cost of advertising, office space
and personnel involved in such activities. The Distributor serves in such
capacity without remuneration from the Fund.
Other Service Providers
BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio 43219-3035,
serves as the Trust's transfer agent and dividend disbursing agent and provides
certain accounting services for the Fund. BISYS Ohio receives an annual fee of
$14 per Variable Contract Owner account, subject to certain per-Fund base fees,
for its services as transfer agent, and, for its services as fund accountant,
BISYS Ohio receives a fee, computed daily and paid periodically, at an annual
rate equal to the greater of 0.03% of the Fund's average daily net assets or
$30,000.
Coopers & Lybrand L.L.P. serves as independent auditors for the Trust. Fifth
Third Bank is the custodian for the Fund. See "MANAGEMENT OF THE TRUST" in the
Statement of Additional Information for further information.
While BISYS Ohio is a distinct legal entity from BISYS (the Trust's
administrator and distributor), BISYS Ohio is considered to be an affiliated
person of BISYS under the 1940 Act due to, among other things, the fact that
BISYS Ohio is owned by substantially the same persons that directly or
indirectly own BISYS.
Variable Contract Owner Servicing Agents
The Trust has adopted a plan under which up to 0.25% of the Fund's average daily
net assets may be expended to procure Variable Contract Owner services. Pursuant
to agreements with the Fund, certain financial institutions and their affiliates
serve as Variable Contract Owner Servicing Agents to the Fund. A Variable
Contract Owner Servicing Agent generally provides support services to its
clients who are Variable Contract Owners by establishing and maintaining
accounts and records, providing account information, arranging for bank wires,
responding to routine inquiries, forwarding Variable Contract Owner
communications, assisting in the processing of purchase, exchange and redemption
requests, and assisting Variable Contract Owners in changing account
designations and addresses. For expenses incurred and services provided, each
Variable Contract Owner Servicing Agent receives a fee from the Fund, computed
daily and paid monthly, at an annual rate of up to 0.25% of the average daily
net assets of the Fund allocable to Variable Contracts owned by customers of the
Variable Contract Owner Servicing Agent. A Variable Contract Owner Servicing
Agent may periodically waive all or a portion of its servicing fees with respect
to the Fund to increase the net income of the Fund available for distribution as
dividends.
<PAGE>
Expenses
BB&T and the Administrator each bear all expenses in connection with the
performance of its services other than the cost of securities (including
brokerage commissions) purchased for the Fund. The Fund will bear the following
expenses relating to its operation: taxes, interest, fees of the Trustees of the
Trust, Securities and Exchange Commission fees, outside auditing and legal
expenses, advisory and administration fees, fees and out-of-pocket expenses of
the Custodian and fund accountant, certain insurance premiums, costs of
maintenance of the Trust's existence, costs of Shareholders' reports and
meetings, and any extraordinary expenses incurred in the Fund's operation. For
the fiscal period ended December 31, 1997, the Fund's ratio of operating
expenses to average daily net assets (including the effect of applicable fee
waivers and expense reimbursements), on an annual basis, was 0.91%.
Banking Laws
Federal banking laws and regulations presently restrict the ability of a bank
such as BB&T, or any affiliate thereof, from sponsoring, organizing or
controlling a registered open-end investment company continuously engaged in the
issuance of its shares, and generally from underwriting, selling or distributing
securities, such as Shares of the Fund.
BB&T believes that it may perform advisory services for the Fund as described
herein, and that it or its affiliates may perform Variable Contract Owner
servicing activities and may receive compensation without violating federal
banking laws and regulations.
In the event that, due to future events, BB&T is prohibited from acting as the
investment adviser of the Fund, it is probable that the Board of Trustees would
either recommend to Shareholders the selection of another qualified adviser or,
if that course of action appeared impractical, that the Fund be liquidated.
Year 2000
The services provided to the Fund by BB&T, BISYS, BISYS Ohio, and the Fund's
other service providers (collectively, the "Service Providers") are dependent on
those Service Providers' computer systems. Many computer software and hardware
systems in use today cannot distinguish between the year 2000 and the year 1900
because of the way dates are encoded and calculated (the "Year 2000 Issue"). The
failure to make this distinction could have a negative impact on the Service
Providers' ability to handle securities trades, price securities, and conduct
general account services on behalf of the Fund. The Trust is working with the
Service Providers to take steps that are reasonably designed to address the Year
2000 Issue with respect to computer systems relied on by the Fund. The Trust has
no reason to believe that these steps will not be sufficient to avoid any
material adverse impact on the Fund, although there can be no assurances. The
costs or consequences of an incomplete or an untimely resolution of the Year
2000 Issue are unknown to the Trust and the Service Providers at this time, but
could have a material adverse impact on the operations of the Fund and the
Service Providers.
<PAGE>
TAXATION
The Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). Accordingly, if the Fund
so qualifies, it generally will not be subject to federal income taxes to the
extent that it distributes on a timely basis its investment company taxable
income and its net capital gains.
To comply with regulations under section 817(h) of the Code, the Fund is
required to diversify its investments. Generally, the Fund will be required to
diversify its investments so that on the last day of each quarter of a calendar
year no more than 55% of the value of its total assets is represented by any one
investment, no more than 70% is represented by any two investments, no more than
80% is represented by any three investments, and no more than 90% is represented
by any four investments. For this purpose, securities of a given issuer
generally are treated as one investment, but each U.S. Government agency and
instrumentality is treated as a separate issuer. Any security issued,
guaranteed, or insured (to the extent so guaranteed or insured) by the U.S. or
an agency or instrumentality of the U.S. is treated as a security issued by the
U.S. Government or its agency or instrumentality, whichever is applicable.
Compliance with the diversification rules under Section 817(h) of the Code
generally will limit the ability of the Fund to invest greater than 55% of its
total assets in direct obligations of the U.S. Treasury (or any other issuer) or
to invest primarily in securities issued by a single agency or instrumentality
of the U.S. Government. If the Fund fails to meet the diversification
requirement under Section 817(h) of the Code, income with respect to Variable
Contracts invested in the Fund at any time during the calendar quarter in which
the failure occurred could become currently taxable to the owners of such
Variable Contracts. Similarly, income for prior periods with respect to such
contracts also could be taxable, most likely in the year of the failure to
achieve the required diversification. Other adverse tax consequences could also
ensue. If the Fund failed to qualify as a regulated investment company, the
results would be substantially the same as a failure to meet the diversification
requirements under Section 817(h) of the Code.
The Treasury Department announced that it would issue future regulations or
rulings addressing the circumstances in which a variable contract owner's
control of the investments of the separate account may cause the contract owner,
rather than the insurance company, to be treated as the owner of the assets held
by the separate account. If the contract owner is considered the owner of the
securities underlying the separate account, income and gains produced by those
securities would be included currently in the contract owner's gross income. It
is not known what standards will be set forth in the regulations or rulings.
In the event that rules or regulations are adopted, there can be no assurance
that the Fund will be able to operate as currently described, or that the Trust
will not have to change the Fund's investment objective or investment policies.
While the Fund's investment objective is fundamental and may be changed only by
a vote of a majority of its outstanding Shares, the investment policies of the
Fund may be modified as necessary to prevent any such prospective rules and
regulations from causing Variable Contract Owners to be considered the owners of
the Shares of the Fund.
Reference is made to the prospectus for the Separate Account and Variable
Contract for information regarding the federal income tax treatment of
distributions to the Separate Account. See "ADDITIONAL INFORMATION - Additional
Tax Information" in the Statement of Additional Information for more information
on taxes.
<PAGE>
GENERAL INFORMATION
Description of the Trust and Its Shares
The Trust was organized as a Massachusetts business trust in 1994 and currently
consists of four portfolios. Each Share represents an equal proportionate
interest in the Fund with other Shares of the Fund, and is entitled to such
dividends and distributions out of the income earned on the assets belonging to
the Fund as are declared at the discretion of the Trustees. Shares are without
par value. Shareholders are entitled to one vote for each dollar of value
invested and a proportionate fractional vote for any fraction of a dollar
invested. Shareholders will vote in the aggregate and not by portfolio except as
otherwise expressly required by law.
An annual or special meeting of Shareholders to conduct necessary business is
not required by the Trust's Declaration of Trust, the 1940 Act or other
authority except, under certain circumstances, to elect Trustees, amend the
Declaration of Trust, approve an investment advisory agreement and to satisfy
certain other requirements. To the extent that such a meeting is not required,
the Trust may elect not to have an annual or special meeting.
The Trust will call a special meeting of Shareholders for purposes of
considering the removal of one or more Trustees upon written request therefor
from Shareholders holding not less than 10% of the outstanding votes of the
Trust. At such a meeting, a quorum of Shareholders (constituting a majority of
votes attributable to all outstanding Shares of the Trust), by majority vote,
has the power to remove one or more Trustees. In accordance with current laws,
it is anticipated that an insurance company issuing a variable contract that
participates in the Fund will request voting instructions from variable contract
owners and will vote shares or other voting interests in the separate account in
proportion of the voting instructions received. The Separate Account and
qualified pension and retirement plans are currently the only Shareholders of
the Fund, although other separate accounts of Hartford, or of other insurance
companies, may become Shareholders in the future.
Performance Information
From time to time performance information for the Fund showing its average
annual total return, aggregate total return and/or yield may be presented in
advertisements, sales literature and shareholder reports. Such performance
figures are based on historical earnings and are not intended to indicate future
performance. Average annual total return of the Fund will be calculated for the
period since the establishment of the Fund. Average annual total return is
measured by comparing the value of an investment in the Fund at the beginning of
the relevant period to the redemption value of the investment at the end of the
period (assuming immediate reinvestment of any dividends or capital gains
distributions and analyzing the result). Aggregate total return is calculated
similarly to average annual total return except that the return figure is
aggregated over the relevant period instead of annualized. Yield of the Fund
will be computed by dividing the net investment income per Share earned during a
recent one-month period by the per Share maximum offering price (reduced by any
undeclared earned income expected to be paid shortly as a dividend) on the last
day of the period and analyzing the result. Performance information for the Fund
will not be advertised or included in sales literature unless accompanied by
comparable performance information for the Separate Account.
<PAGE>
In addition, from time to time the Fund may present its distribution rate in
supplemental sales literature which is accompanied or preceded by a prospectus
and in Shareholder reports. The distribution rate will be computed by dividing
the distribution per Share made by the Fund over a twelve-month period by the
maximum offering price per Share. The calculation of income in the distribution
rate includes both income and capital gain dividends and does not reflect
unrealized gains or losses, although the Fund may also present a distribution
rate excluding the effect of capital gains. The distribution rate differs from
the yield, because it includes capital gains which are often non-recurring in
nature, whereas yield does not include such items.
Total return and yield are functions of the type and quality of instruments held
in the portfolio, operating expenses, and market conditions. Consequently, total
return and yield will fluctuate and are not necessarily representative of future
results. Quotations of yield or total return for the Fund will not take into
account charges or deductions against the Separate Account or Variable Contract
specific deductions for cost of insurance charges, premium load, administrative
fees, maintenance fees, premium tax, mortality and expense risks, or other
charges that may be incurred under a Variable Contract for which the Fund serves
as an underlying investment vehicle. The Fund's yield and total return should
not be compared with mutual funds that sell their shares directly to the public
since the figures provided do not reflect charges against the Separate Account
or the Variable Contracts. Performance information for the Fund reflects only
the performance of a hypothetical investment in the Fund during the particular
time period on which the calculations are based. In addition, if BB&T or BISYS
voluntarily reduce all or a part of their respective fees, the total return of
the Fund will be higher than it would otherwise be in the absence of such
voluntary fee reductions.
Miscellaneous
Inquiries regarding the Trust may be directed in writing to the Trust at 3435
Stelzer Road, Columbus, Ohio 43219-3035, or by calling toll free (800) 257-5872.
No person has been authorized to give any information or to make any
representations not contained in this Prospectus in connection with the offering
made by this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Fund or
its Distributor. This Prospectus does not constitute an offering by the Fund or
by its Distributor in any jurisdiction in which such offering may not be
lawfully made.
<PAGE>
AmSouth Regional Equity Fund
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
1-800-257-5872
Variable Insurance Funds (the "Trust") is an open-end management investment
company that currently offers four separate diversified investment portfolios,
each with different investment objectives and policies. This Prospectus
describes one of those portfolios, the AmSouth Regional Equity Fund (the
"Fund").
Additional information about the Trust and each of the Funds, contained in a
Statement of Additional Information dated May 1, 1998, as amended or
supplemented, has been filed with the Securities and Exchange Commission and is
available upon request without charge by writing to the Trust at its address or
by calling the Trust at the telephone number shown above. The Statement of
Additional Information is incorporated herein by reference.
The Fund currently sells its shares of beneficial interest ("Shares") to a
segregated asset account ("Separate Account") of Hartford Life Insurance Company
("Hartford") to serve as the investment medium for variable annuity contracts
("Variable Contracts") issued by Hartford. Shares of the Fund also are sold to
qualified pension and retirement plans outside of the separate account context.
The Separate Account invests in Shares of the Fund in accordance with allocation
instructions received from owners of the Variable Contracts ("Variable Contract
Owners"). Such allocation rights are described further in the accompanying
Separate Account prospectus.
Shares of the Fund are not deposits or obligations of, and are not endorsed,
insured or guaranteed by, any bank, the Federal Deposit Insurance Corporation,
or any other agency. An investment in the Fund involves investment risk,
including the possible loss of principal.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Investors should read this
Prospectus and retain it for future reference.
THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF THE
SEPARATE ACCOUNT, WHICH ACCOMPANIES THIS PROSPECTUS. BOTH PROSPECTUSES SHOULD BE
READ CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1998
<PAGE>
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY.........................................
Shares Offered....................................
Investment Objectives.............................
Investment Policies...............................
Risk Factors and Special Considerations...........
Investment Adviser................................
Other Information.................................
FUND EXPENSES..............................................
INVESTMENT OBJECTIVE AND POLICIES..........................
INVESTMENT TECHNIQUES AND RISK FACTORS.....................
VALUATION OF SHARES........................................
PURCHASING SHARES..........................................
REDEEMING SHARES...........................................
MANAGEMENT OF THE FUND.....................................
Trustees..........................................
Investment Adviser................................
Administrator and Distributor.....................
Other Service Providers...........................
Variable Contract Owner Servicing Agents..........
Expenses..........................................
Banking Laws......................................
Year 2000.........................................
TAXATION...................................................
GENERAL INFORMATION........................................
Description of the Trust and Its Shares...........
Performance Information...........................
Miscellaneous.....................................
<PAGE>
PROSPECTUS SUMMARY
Shares Offered . . . . . . . . . . . Shares of the Fund, a diversified
investment portfolio of the Trust, a
Massachusetts business trust which is
registered as an open-end management
investment company. Shares of the Fund
may be offered in the future to other
separate accounts of Hartford, or to
separate accounts established by other
affiliated or unaffiliated insurance
companies, to serve as the underlying
investment medium for variable annuity
and variable life insurance contracts,
which may pose certain risks discussed
under "PURCHASING SHARES."
Investment Objectives. . . . . The Fund seeks to provide capital growth.
Investment Policies . . . . . . . . The Regional Equity Fund seeks its
investment objective by investing
primarily in a diversified portfolio of
common stocks and securities convertible
into common stocks, such as convertible
bonds and convertible preferred stocks,
of companies headquartered in the
Southern Region of the United States.
Risk Factors and Special
Considerations . . . . . . . . . An investment in the Fund involves a
certain amount of risk and may not be
suitable for all investors. See
"INVESTMENT TECHNIQUES AND RISK
FACTORS."
Investment Adviser. . . . . . . . . . AmSouth Bank ("AmSouth"), Birmingham,
Alabama, serves as investment adviser to
the Fund. See "MANAGEMENT OF THE FUND -
Investment Adviser."
Other Information . . . . . . . . . . . AmSouth is the custodian for the Fund.
BISYS Fund Services ("BISYS" or
"Distributor" or "Administrator") serves
as the distributor and administrator of
the Fund. BISYS Fund Services Ohio, Inc.
("BISYS Ohio") serves as transfer agent
and dividend disbursing agent and
provides certain accounting services for
the Trust.
<PAGE>
FUND EXPENSES
The following expense table indicates costs and expenses that an investor should
anticipate incurring either directly or indirectly as a Shareholder of the Fund
during its first fiscal year of operation. The numbers reflect estimated levels
of operating expenses.
Annual Fund Operating Expenses
(as a percentage of average net assets annualized)
Management Fees After Waiver (1)........................................0.25%
Other Expenses After Waiver (2).........................................1.00%
-----
Total Fund Operating Expenses After Waivers (3)........................ 1.25%
-----
-----
- -------------------
1 AmSouth has undertaken to waive a portion of its investment advisory fee
and reimburse expenses to the extent that "Total Fund Operating Expenses"
for the Fund would exceed 1.25% of average daily net assets. Absent this
waiver, "Management Fees" as a percentage of the Fund's average daily net
assets would be 0.60%.
2 BISYS has agreed to waive a portion of its administrative fees. Absent this
waiver and expense reimbursements noted in 1 above, "Other Expenses" as a
percentage of the Fund's average daily net assets would be 1.10%.
3 Absent waivers and expense reimbursements, "Total Fund Operating Expenses"
as a percentage of the Fund's average daily net assets would be 1.70%.
The purpose of this table is to assist the prospective investor in understanding
the various costs and expenses that a Shareholder in the Fund will bear. The
following Example illustrates the expenses borne by Fund Shareholders.
Example
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return, and (2) redemption at the end of each time
period:
Expenses
1 Year............................................... $13
3 Years.............................................. $40
- ----------------
* This example should not be considered a representation of future
expenses, which may be more or less than those shown. The assumed 5%
annual return is hypothetical and should not be considered a
representation of past or future annual return. Actual return may be
greater or less than the assumed amount.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Shareholders should be aware that the investments made by the Fund at any given
time are not expected to be the same as those made by other mutual funds for
which AmSouth acts as investment adviser, including mutual funds with names,
investment objectives and policies similar to the Fund. Investors should
carefully consider their investment goals and willingness to tolerate investment
risk before allocating their investment to the Fund.
The Fund seeks to provide capital growth. It seeks this objective by investing
primarily in a diversified portfolio of common stock and securities convertible
into common stock, such as convertible bonds and convertible preferred stocks.
Such securities must be issued by companies headquartered in the Southern Region
of the United States, which includes Alabama, Florida, Georgia, Louisiana,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia. The
production of current income is an incidental objective of the Regional Equity
Fund. Most companies in which the Fund invests are listed on national securities
exchanges.
AmSouth seeks to invest in equity securities which are believed to represent
investment value. Factors which AmSouth may consider in selecting equity
securities include industry and company fundamentals, historical price
relationships, and/or underlying asset value.
AmSouth may use a variety of economic projections, technical analysis, and
earnings projections in formulating individual stock purchase and sale
decisions. AmSouth will select investments that it believes have basic
investment value which will eventually be recognized by other investors, thus
increasing their value to the Fund. In the selection of the investments for the
Fund, AmSouth may therefore be making investment decisions which could be
contrary to the present expectations of other professional investors. These
decisions may involve greater risks compared to other mutual funds, of either
(a) more accurate assessment by other investors, in which case losses may be
incurred by the Fund, or (b) long delay in investor recognition of the accuracy
of the investment decisions of the Fund, in which case invested capital of the
Fund in an individual security or group of securities may not appreciate for an
extended period.
Under normal market conditions, the Fund may also invest up to 35% of the value
of its total assets in common stocks and securities convertible into common
stock of companies headquartered outside the Southern Region, preferred stocks,
corporate bonds, mortgage-related and asset-backed securities, notes, money
market mutual funds, warrants, and obligations with maturities of 12 months or
less such as commercial paper (including variable amount master demand notes),
bankers' acceptances, certificates of deposit, repurchase agreements,
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, and demand and time deposits of domestic and foreign banks
and savings and loan associations. If deemed appropriate for temporary defensive
purposes, the Fund may increase its holdings in short-term obligations up to
100% of its total assets and may also hold uninvested cash pending investment.
The Fund may also write covered call options. See "INVESTMENT TECHNIQUES AND
RISK FACTORS."
<PAGE>
The Fund normally invests at least 65% of the value of its total assets in
common stock and securities convertible into common stock of companies
headquartered in the Southern Region. There can be no assurance that the economy
of the Southern Region or the companies headquartered in the Southern Region
will grow in the future, or that a company headquartered in the Southern Region
whose assets, revenues or employees are located substantially outside of the
Southern Region will share in any economic growth of the Southern Region.
Additionally, any localized negative economic factors or possible physical
disasters in the Southern Region could have much greater impact on the Fund's
assets than on similar funds whose investments are geographically more diverse.
* * * *
The investment objective of the Fund is a fundamental policy and as such may not
be changed without a vote of the holders of a majority of the outstanding Shares
of the Fund. Other policies of the Fund may be changed without a vote of the
holders of a majority of outstanding Shares of the Fund unless (i) the policy is
expressly deemed to be a fundamental policy or (ii) the policy is expressly
deemed to be changeable only by such majority vote. There can be no assurance
that the investment objective of the Fund will be achieved.
INVESTMENT TECHNIQUES AND RISK FACTORS
Like any investment program, an investment in a Fund entails certain risks.
Convertible Securities
Convertible securities are fixed income securities that may be exchanged or
converted into a predetermined number of the issuer's underlying common stock at
the option of the holder during a specified time period. Convertible securities
may take the form of convertible preferred stock, convertible bonds or
debentures, units consisting of "usable" bonds and warrants or a combination of
the features of several of these securities. The Fund may invest in convertible
securities that are rated in the fourth highest rating group, or higher, by a
nationally recognized statistical rating organization ("NRSRO") at the time of
investment, or if unrated, are of comparable quality. The fourth highest rating
group corresponds to a rating of "BBB" by Standard & Poor's Ratings Services
("S&P") and "Baa" by Moody's Investors Service, Inc. ("Moody's"). If a
convertible security falls below the minimum rating after the Fund has purchased
it, the Fund is not required to drop the convertible bond from its portfolio,
but will consider appropriate action. The investment characteristics of each
convertible security vary widely, which allows convertible securities to be
employed for different investment objectives.
Convertible bonds and convertible preferred stocks are fixed income securities
that generally retain the investment characteristics of fixed income securities
until they have been converted but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed income of a bond
or the dividend preference of a preferred stock until the holder elects to
exercise the conversion privilege. Usable bonds are corporate bonds that can be
used in whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock. When owned as part of a unit along with
warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before the
bond's maturity. Convertible securities are senior to equity securities, and,
therefore, have a claim to assets of the corporation prior to the holders of
common stock in the case of liquidation. However, convertible securities are
generally subordinated to similar non-convertible securities of the same
company. The interest income and dividends from convertible bonds and preferred
stocks provide a stream of income with generally higher yields than common
stocks, but lower than non-convertible securities of similar quality.
<PAGE>
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which, in
the opinion of AmSouth, the investment characteristics of the underlying common
shares will assist the Fund in achieving its investment objective. Otherwise,
the Fund will hold or trade the convertible securities. In selecting convertible
securities for the Fund, AmSouth evaluates the investment characteristics of the
convertible security as a fixed income instrument, and the investment potential
of the underlying equity security for capital appreciation. In evaluating these
matters with respect to a particular convertible security, AmSouth considers
numerous factors, including the economic and political outlook, the value of the
security relative to other investment alternatives, trends in the determinants
of the issuer's profits, and the issuer's management capability and practices.
As with all fixed income securities, the market values of convertible securities
tend to increase when interest rates decline and, conversely, tend to decline
when interest rates increase.
Put and Call Options
The Fund may write covered call options (options on securities or currencies
owned by the Fund). When a portfolio security or currency subject to a call
option is sold, the Fund will effect a "closing purchase transaction"--the
purchase of a call option on the same security or currency with the same
exercise price and expiration date as the call option which the Fund previously
has written. If the Fund is unable to effect a closing purchase transaction, it
will not be able to sell the underlying security or currency until the option
expires or the Fund delivers the underlying security or currency upon exercise.
In addition, upon the exercise of a call option by the holder thereof, the Fund
will forego the potential benefit represented by market appreciation over the
exercise price. Under normal conditions, it is not expected that the Fund will
cause the underlying value of portfolio securities and/or currencies subject to
such options to exceed 25% of its total assets.
Foreign Securities
The Fund may invest in foreign securities through the purchase of American
Depository Receipts ("ADRs") or the purchase of securities of the Toronto Stock
Exchange, but will not do so if immediately after a purchase and as a result of
the purchase the total value of such foreign securities owned by the Fund would
exceed 25% of the value of the total assets of the Fund. The Fund may also
invest in securities issued by foreign branches of the U.S. banks and foreign
banks and in Canadian Commercial Paper and Europaper, which is U.S. dollar
denominated commercial paper of a foreign issuer.
Investment in foreign securities is subject to special investment risks that
differ in some respects from those related to investments in securities of U.S.
domestic issuers. Such risks include political, social or economic instability
in the country of the issuer, the difficulty of predicting international trade
patterns, the possibility of the imposition of exchange controls, expropriation,
limits on removal of currency or other assets, nationalization of assets,
foreign withholding and income taxation, and foreign trading practices
(including higher trading commissions, custodial charges and delayed
settlements). Such securities may be subject to greater fluctuations in price
than securities issued by U.S. corporations or issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. The markets on which such
<PAGE>
securities trade may have less volume and liquidity, and may be more volatile
than securities markets in the U.S. In addition, there may be less publicly
available information about a foreign company than about a U.S. domiciled
company. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
U.S. domestic companies. There is generally less government regulation of
securities exchanges, brokers and listed companies abroad than in the U.S.
Confiscatory taxation or diplomatic developments could also affect investment in
those countries. In addition, foreign branches of U.S. banks, foreign banks and
foreign issuers may be subject to less stringent reserve requirements and to
different accounting, auditing, reporting, and recordkeeping standards than
those applicable to domestic branches of U.S. banks and U.S. domestic issuers.
If a security is denominated in foreign currency, the value of the security to
the Fund will be affected by changes in currency exchange rates and in exchange
control regulations, and costs will be incurred in connection with conversions
between currencies. Currency risks generally increase in lesser developed
markets. Exchange rate movements can be large and can endure for extended
periods of time, affecting either favorably or unfavorably the Fund's assets.
For many foreign securities, U.S. dollar denominated ADRs, which are traded in
the United States on exchanges or over-the-counter, are issued by domestic
banks. ADRs represent the right to receive securities of foreign issuers
deposited in a domestic bank or a correspondent bank. ADRs do not eliminate all
the risk inherent in investing in the securities of foreign issuers' stock.
However, by investing in ADRs rather than directly in foreign issuers' stock,
the Fund can avoid currency risks during the settlement period for either
purchase or sales.
Unsponsored ADR programs are organized independently and without the cooperation
of the issuer of the underlying securities. As a result, available information
concerning the issuers may not be as current as for sponsored ADRs, and the
prices of unsponsored depository receipts may be more volatile than if such
instruments were sponsored by the issuer.
Foreign Currency Transactions
The value of the assets of the Fund as measured in U.S. dollars may be affected
favorably or unfavorably by changes in foreign currency exchange rates and
exchange control regulations, and the Fund may incur costs in connection with
conversions between various currencies. The Fund will conduct its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market, or through forward
contracts to purchase or sell foreign currencies. A forward foreign currency
exchange contract ("forward currency contract") involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These forward currency contracts are
traded directly between currency traders (usually large commercial banks) and
their customers. The Fund may enter into forward currency contracts in order to
hedge against adverse movements in exchange rates between currencies.
<PAGE>
By entering into a forward currency contract in U.S. dollars for the purchase or
sale of the amount of foreign currency involved in an underlying security
transaction, the Fund is able to protect itself against a possible loss between
trade and settlement dates resulting from an adverse change in the relationship
between the U.S. dollar and such foreign currency. However, this tends to limit
potential gains which might result from a positive change in such currency
relationships. The Fund may also hedge its foreign currency exchange rate risk
by engaging in a currency financial futures and options transactions. The
forecasting of short-term currency market movements is extremely difficult and
whether such a short-term heading strategy will be successful is highly
uncertain.
It is impossible to forecast with precision the market value of portfolio
securities at the expiration of a forward currency contract. Accordingly, it may
be necessary for the Fund to purchase additional currency on the spot market if
the market value of the security is less than the amount of foreign currency the
Fund is obligated to deliver when a decision is made to sell the security and
make delivery of the foreign currency in settlement of a forward contract.
Conversely, it may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security if its market value
exceeds the amount of foreign currency the Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, it will incur a gain or a lost to the extent that there has been
movement in forward currency contract prices. If the Fund engages in an
offsetting transaction, it may subsequently enter into a new forward currency
contract to sell the foreign currency. Although such contracts tend to minimize
the risk of loss due to a decline in the value of the hedged currency, they also
tend to limit any potential gain which might result should the value of such
currency increase. The Fund will have to convert its holdings of foreign
currencies into U.S. dollars from time to time. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies.
Medium-Grade Securities
The Fund may invest up to 10% of its total assets in debt securities within the
fourth highest rating group assigned by an NRSRO (i.e., BBB or Baa by S&P and
Moody's, respectively) and comparable unrated securities. This limitation does
not apply to convertible securities, which are discussed above. These types of
debt securities are considered by Moody's and S&P to have some speculative
characteristics, and are more vulnerable to changes in economic conditions,
higher interest rates or adverse issuer-specific developments which are more
likely to lead to a weaker capacity to make principal and interest payments than
comparable higher rated debt securities.
Should subsequent events cause the rating of a debt security purchased by a Fund
to fall below BBB or Baa, as the case may be, AmSouth will consider such an
event in determining whether the Fund should continue to hold that security. In
no event, however, would a Fund be required to liquidate any such portfolio
security where the Fund would suffer a loss on the sale of such security.
<PAGE>
Mortgage-Related and Asset-Backed Securities
Investments in these and other derivative securities will not be made for
purposes of leverage or speculation, but rather primarily for conventional
investment or hedging purposes, liquidity, flexibility and to capitalize on
market inefficiencies. Consistent with its investment objective, restrictions
and policies, the Fund may invest in mortgage-related securities, which are
securities representing interests in "pools" of mortgages in which payments of
both interest and principal on the securities are made monthly.
Early repayment of principal on mortgage-related securities may expose the Fund
to a lower rate of return upon reinvestment of principal. Like other fixed
income securities, when interest rates rise, the value of a mortgage-related
security generally will decline; however, when interest rates decline, the value
of mortgage-related securities with prepayment features may not increase as much
as other fixed income securities. For this and other reasons, the stated
maturity of a mortgage-related security may be shortened by unscheduled
prepayments on the underlying mortgages. Alternatively, the rate of prepayments
on underlying mortgages may have the effect of extending the effective maturity
of the security beyond what was anticipated at the time of purchase. To the
extent that unanticipated rates of prepayment on underlying mortgages increase
the effective maturity of a mortgage-related security, the volatility of such
security can be expected to increase. Accordingly, it may not possible to
predict accurately a security's return to the Fund.
Like mortgages underlying mortgage-backed securities, automobile sales contracts
or credit card receivables underlying asset-backed securities are subject to
prepayment, which may reduce the overall return to certificate holders.
Nevertheless, principal prepayment rates tend not to vary much with interest
rates, and the short-term nature of the underlying car loans or other
receivables tends to dampen the impact of any change in the prepayment level.
Certificate holders may also experience delays in prepayment on the certificates
if the full amounts due on underlying sales contracts or receivables are not
realized because of unanticipated legal or administrative costs of enforcing the
contracts or because of depreciation or damage to the collateral (usually
automobiles) securing certain contracts, or other factors. In certain market
conditions, asset-backed securities may experience volatile fluctuations in
value and periods of illiquidity. If consistent with its investment objective
and policies, the Fund may invest in other asset-backed securities that may be
developed in the future.
Certain issuers of asset-backed securities are considered to be investment
companies under the Investment Company Act of 1940 (the "1940 Act"). The Fund
intends to conduct its operations so that it will invest its assets (when
combined with investments in securities of other investment companies, if any)
in the obligations of such issuers within applicable regulatory limits.
U.S. Government Obligations
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; still others are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. Government would
provide financial support to U.S. Government-sponsored agencies or
instrumentalities if it is not obligated to do so by law.
<PAGE>
The Stripped Treasury Obligations in which the Funds may invest do not include
Certificates of Accrual on Treasury Securities ("CATS") or Treasury Income
Growth Receipts ("TIGRs"). Stripped securities are issued at a discount to their
"face value" and may exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest are
returned to investors.
Bankers' Acceptances
The Fund may invest in bankers' acceptances guaranteed by domestic and foreign
banks if at the time of investment the guarantor bank has capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of its most recently
published financial statements).
Certificates of Deposit and Time Deposits
The Fund may invest in certificates of deposit and time deposits of domestic and
foreign banks and savings and loan associations if (a) at the time of investment
the depository institution has capital, surplus, and undivided profits in excess
of $100,000,000 (as of the date of its most recently published financial
statements), or (b) the principal amount of the instrument is insured in full by
the Federal Deposit Insurance Corporation.
Commercial Paper
The Fund may, within the limitations described above, invest in short-term
promissory notes (including variable amount master demand notes) issued by
corporations and other entities, such as municipalities, rated at the time of
purchase within the two highest categories assigned by an NRSRO (e.g., A-2 or
better by S&P, Prime-2 or better by Moody's) or, if not rated, determined to be
of comparable quality to instruments that are so rated. The Fund may also invest
in Canadian Commercial Paper, which is commercial paper issued by a Canadian
corporation or a Canadian counterpart of a U.S. corporation, and in Europaper,
which is U.S. dollar denominated commercial paper of a foreign issuer.
The Fund may invest in variable amount master demand notes, which are unsecured
demand notes that permit the indebtedness thereunder to vary, and that provide
for periodic adjustments in the interest rate according to the terms of the
instrument. Although there is no secondary market in the notes, the Fund may
demand payment of principal and accrued interest at any time. While the notes
are not typically rated by credit rating agencies, issuers of variable amount
master demand notes (which are normally manufacturing, retail, financial, and
other business concerns) must satisfy the same criteria as set forth above for
commercial paper. AmSouth will consider the earning power, cash flow, and other
liquidity ratios of the issuers of such notes and will continuously monitor
their financial status and ability to meet payment on demand. A note will be
deemed to have a maturity equal to the period of time remaining until the
principal amount can be recovered from the issuer through demand. The period of
time remaining until the principal amount can be recovered under a variable
master demand note shall not exceed seven days.
<PAGE>
Repurchase Agreements
Securities held by the Fund may be subject to repurchase agreements. Under the
terms of a repurchase agreement, the Fund would acquire securities from
financial institutions, subject to the seller's agreement to repurchase such
securities at a mutually agreed upon date and price, which includes interest
negotiated on the basis of current short-term rates. The seller under a
repurchase agreement will be required to maintain at all times the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest). If a seller defaults on its repurchase agreements,
the Fund may suffer a loss in disposing of the security subject to the
repurchase agreement. For further information about repurchase agreements, see
"INVESTMENT OBJECTIVES AND POLICIES--Additional Information on Portfolio
Instruments--Repurchase Agreements" in the Statement of Additional Information.
Reverse Repurchase Agreements and Dollar Roll Agreements
The Fund may borrow funds by entering into reverse repurchase agreements and
dollar roll agreements. Pursuant to such reverse repurchase agreements, the Fund
would sell certain of its securities to financial institutions such as banks and
broker-dealers, and agree to repurchase them, or substantially similar
securities in the case of a dollar roll agreement, at a mutually agreed upon
date and price. A dollar roll agreement is analogous to a reverse repurchase
agreement, with the Fund selling mortgage-backed securities for delivery in the
current month and simultaneously contracting to repurchase substantially similar
(same type, coupon and maturity) securities on a specified future date. At the
time the Fund enters into a reverse repurchase agreement or dollar roll
agreement, it will place in a segregated custodial account assets such as U.S.
Government securities or other liquid securities consistent with its investment
restrictions having a value equal to the repurchase price (including accrued
interest), and will subsequently continually monitor the account to ensure that
such equivalent value is maintained at all times. Reverse repurchase agreements
and dollar roll agreements involve the risk that the market value of securities
to be purchased by the Fund may decline below the price at which it is obligated
to repurchase the securities, or that the other party may default on its
obligation, so that the Fund is delayed or prevented from completing the
transaction.
When-Issued and Delayed-Delivery Transactions
The Fund may purchase securities on a when-issued or delayed-delivery basis. The
Fund will engage in when-issued and delayed-delivery transactions only for the
purpose of acquiring portfolio securities consistent with its investment
objective and policies, not for investment leverage. When-issued securities are
securities purchased for delivery beyond the normal settlement date at a stated
price and yield and thereby involve a risk that the yield obtained in the
transaction will be less than that available in the market when delivery takes
place. The Fund will not pay for such securities or start earning interest on
them until they are received. When the Fund agrees to purchase such securities,
its Custodian will set aside cash or liquid securities equal to the amount of
the commitment in a segregated account. In when-issued and delayed-delivery
transactions, the Fund relies on the seller to complete the transaction; the
seller's failure to do so may cause the Fund to miss a price or yield considered
to be advantageous.
<PAGE>
Lending of Portfolio Securities
In order to generate additional income, the Fund may from time to time lend
portfolio securities to broker-dealers, banks or institutional borrowers of
securities. The Fund must receive 100% collateral, in the form of cash or U.S.
Government securities. This collateral must be valued daily, and should the
market value of the loaned securities increase, the borrower must furnish
additional collateral to the lender. During the time portfolio securities are on
loan, the borrower pays the lender any dividends or interest paid on such
securities. Loans are subject to termination by the lender or the borrower at
any time. While the Fund does not have the right to vote securities on loan,
each lender intends to terminate the loan and regain the right to vote if that
is considered important with respect to the investment. In the event the
borrower defaults on its obligation to the Fund, the lender could experience
delays in recovering its securities and possible capital losses. The Fund will
only enter into loan arrangements with broker-dealers, banks or other
institutions determined to be creditworthy under guidelines established by the
Board of Trustees that permit the Fund to loan up to 33 1/3% of the value of its
total assets.
Short-Term Obligations
The Fund may invest in high quality, short-term obligations (with maturities of
12 months or less) such as domestic and foreign commercial paper (including
variable amount master demand notes), bankers' acceptances, certificates of
deposit and demand and time deposits of domestic and foreign branches of U.S.
banks and foreign banks, and repurchase agreements, in order to acquire interest
income combined with liquidity. Such investments will be limited to those
obligations which, at the time of purchase, (i) possess one of the two highest
short-term ratings from NRSROs or (ii) do not possess a rating (i.e., are
unrated) but are determined to be of comparable quality to rated instruments
eligible for purchase. Under normal market conditions, the Fund will limit its
investment in short-term obligations to 35% of its total assets. For temporary
defensive purposes, as determined by AmSouth, these investments may constitute
100% of the Fund's portfolio and, in such circumstances, will constitute a
temporary suspension of the Fund's attempts to achieve its investment objective.
Short-Term Trading
In order to generate income, the Fund may engage in the technique of short-term
trading. Such trading involves the selling of securities held for a short time,
ranging from several months to less than a day. The object of such short-term
trading is to increase the potential for capital appreciation and/or income of
the Fund in order to take advantage of what AmSouth believes are changes in
market, industry or individual company conditions or outlook. Any such trading
would increase the portfolio turnover rate of the Fund and its transaction
costs.
Securities Issued by Other Investment Companies
The Fund may invest up to 10% of its total assets in shares of money market
mutual funds for cash management purposes. The Fund will incur additional
expenses due to the duplication of expense as a result of investing in other
investment companies.
<PAGE>
Restricted Securities
Securities in which the Fund may invest include securities issued by
corporations without registration under the Securities Act of 1933, as amended
(the "1933 Act"), in reliance on the so-called "private placement" exemption
from registration which is afforded by Section 4(2) of the 1933 Act ("Section
4(2) securities"). Section 4(2) securities are restricted as to disposition
under the federal securities laws, and generally are sold to institutional
investors such as the Fund who agree that they are purchasing the securities for
investment and not with a view to public distribution. Any resale must also
generally be made in an exempt transaction. Section 4(2) securities are normally
resold to other institutional investors through or with the assistance of the
issuer or investment dealers who make a market in such Section 4(2) securities,
thus providing liquidity. Pursuant to procedures adopted by the Board of
Trustees of the Trust, AmSouth may determine Section 4(2) securities to be
liquid if such securities are readily marketable. These securities may include
securities eligible for resale under Rule 144A under the 1933 Act.
VALUATION OF SHARES
The net asset value of the Fund is determined and its Shares are priced as of
the closing of the New York Stock Exchange ("NYSE") (generally 4:00 p.m. Eastern
Time) on each Business Day ("Valuation Time"). As used herein, Business Day is a
day on which the NYSE is open for trading, and any other day except days on
which there are insufficient changes in the value of the Fund's portfolio
securities to materially affect the Fund's net asset value or days on which no
Shares are tendered for redemption and no order to purchase any Shares is
received. Currently, the NYSE is closed on the following holidays: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas.
Net asset value per Share for purposes of pricing sales and redemptions is
calculated by dividing the value of all securities and other assets belonging to
the Fund, less the liabilities charged to the Fund and any liabilities allocable
to the Fund, by the number of the Fund's outstanding Shares. The net asset value
per Share of the Fund will fluctuate as the value of the investment portfolio of
the Fund changes.
The securities in the Fund will be valued at market value. If market quotations
are not available, the securities will be valued by a method which the Board of
Trustees believes accurately reflects fair value. For further information about
valuation of investments, see "NET ASSET VALUE" in the Statement of Additional
Information.
PURCHASING SHARES
As of the date of this Prospectus, Shares of the Fund are offered for purchase
by the Separate Account to serve as an investment medium for the Variable
Contracts issued by Hartford, and to qualified pension and retirement plans
outside of the separate account context. Shares of the Funds may be offered in
the future to other separate accounts established by or sold to separate
accounts of other affiliated or unaffiliated insurance companies, and may be
offered in the future to serve as an investment medium for variable life
insurance policies.
<PAGE>
While the Fund currently does not foresee any disadvantages to Variable Contract
Owners if the Fund serves as an investment medium for both variable annuity
contracts and variable life insurance policies, due to differences in tax
treatment or other considerations, it is theoretically possible that the
interest of owners of annuity contracts and insurance policies for which the
Fund served as an investment medium might at some time be in conflict. However,
the Trust's Board of Trustees and each insurance company with a separate account
allocating assets to the Fund would be required to monitor events to identify
any material conflicts between variable annuity contract owners and variable
life insurance policy owners, and would have to determine what action, if any
should be taken in the event of such a conflict. If such a conflict occurred, an
insurance company participating in the Fund might be required to redeem the
investment of one or more of its separate accounts from the Fund, which might
force the Fund to sell securities at disadvantageous prices.
Shares of the Fund are purchased at the net asset value per Share (see
"VALUATION OF SHARES") next determined after receipt by the Distributor of an
order to purchase Shares. Purchases of Shares of the Fund will be effected only
on a Business Day of the Fund. An order received prior to the Valuation Time on
any Business Day will be executed at the net asset value determined as of the
Valuation Time on the date of receipt. An order received after the Valuation
Time on any Business Day will be executed at the net asset value determined as
of the Valuation Time on the next Business Day of the Fund.
The Fund reserves the right to discontinue offering Shares at any time. In the
event that the Fund ceases offering its Shares, any investments allocated to the
Fund will, subject to any necessary regulatory approvals, be invested in another
portfolio of the Trust deemed appropriate by the Trustees.
REDEEMING SHARES
Shares may be redeemed without charge on any day that net asset value is
calculated (see "VALUATION OF SHARES"). All redemption orders are effected at
the net asset value per Share next determined after receipt by the Distributor
of a redemption request. Payment for Shares redeemed normally will be made
within seven days.
The Trust intends to pay cash for all Shares redeemed, but under abnormal
conditions which make payment in cash unwise, payment may be made wholly or
partly in portfolio securities at their then market value equal to the
redemption price. In such cases, a Shareholder may incur brokerage costs in
converting such securities to cash.
See the Statement of Additional Information ("ADDITIONAL PURCHASE AND REDEMPTION
INFORMATION") for examples of when the right of redemption may be suspended.
Variable Contract Owners do not deal directly with the Fund to purchase or
redeem Shares, and Variable Contract Owners should refer to the prospectus for
the Separate Account for information on the allocation of premiums and on
transfers of accumulated value among sub-accounts of the Separate Account that
invests in the Fund.
<PAGE>
MANAGEMENT OF THE FUND
Trustees
Overall responsibility for management of the Trust rests with its Board of
Trustees. The Trust will be managed by the Trustees in accordance with the laws
of the Commonwealth of Massachusetts governing business trusts. The Trustees, in
turn, elect the officers of the Trust to supervise its day-to-day operations.
Investment Adviser
AmSouth. AmSouth is the investment adviser of the Funds. AmSouth is the
principal bank affiliate of AmSouth Bancorporation, one of the largest banking
institutions headquartered in the mid-south region. AmSouth Bancorporation
reported assets as of September 30, 1997 of $18.1 billion and operated 272
banking offices and over 600 ATM locations in Alabama, Florida, Georgia and
Tennessee. AmSouth has provided investment management services through its Trust
Investment Department since 1915. As of September 30, 1997. AmSouth and its
affiliates had over $8.2 billion in assets under discretionary management and
provided custody services for an additional $20.5 billion in securities.
AmSouth, whose principal business address is 1901 Sixth Avenue North,
Birmingham, Alabama 35203, is the largest provider of trust services in Alabama.
AmSouth serves as administrator for over $12 billion in bond issues, and its
Trust Natural Resources and Real Estate Department is a major manager of
timberland, mineral, oil and gas properties and other real estate interests.
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the investment objective and restrictions of the Fund, AmSouth
manages the Fund, makes decisions with respect to and places orders for all
purchases and sales of their investment securities, and maintains their records
relating to such purchases and sales. Pedro Verdu, CFA, is the portfolio manager
for the Fund and, as such, has primary responsibility for the day-to-day
portfolio management of the Fund. Mr. Verdu has twenty-eight years of experience
as an analyst and portfolio manager; he is currently the Director of Equity
Investing at AmSouth.
Under an investment advisory agreement between the Trust and AmSouth, the fee
payable to AmSouth by the Fund for investment advisory services is the lesser of
(a) a fee computed daily and paid monthly at the annual rate of 0.60% of the
Fund's daily net assets or (b) such fee as may from time to time be agreed upon
in writing by the Trust and AmSouth. A fee agreed to in writing from time to
time by the Trust and AmSouth may be lower than the fee calculated at the
contractual annual rate and the effect of such lower fee would be to lower the
Fund's expenses and increase the net income of the Fund during the period when
such lower fee is in effect.
Administrator and Distributor
BISYS, 3435 Stelzer Road, Columbus, Ohio 43219-3035, a division of BISYS Group,
Inc., is the administrator for the Fund, and also acts as the Trust's principal
underwriter and distributor.
The Administrator generally assists in all aspects of the Fund's administration
and operation. For expenses assumed and services provided as administrator
pursuant to its Management and Administration Agreement with the Trust, the
Administrator receives a fee from the Fund equal to the lesser of a fee,
computed daily and paid periodically, at the annual rate of 0.20% of the Fund's
average daily net assets, or such other fee as may be agreed upon from time to
time by the Trust and the Administrator. The Administrator may periodically
voluntarily reduce all or a portion of its administrative fee with respect to
the Fund to increase the net income of the Fund available for distribution as
dividends. The voluntary fee reduction will cause the yield of the Fund to be
higher than it would otherwise be in the absence of such a reduction.
<PAGE>
The Distributor acts as agent for the Fund in the distribution of its Shares
and, in such capacity, advertises and pays the cost of advertising, office space
and its personnel involved in such activities. The Distributor serves in such
capacity without remuneration from the Fund.
Other Service Providers
BISYS Ohio, 3435 Stelzer Road, Columbus, Ohio 43219-3035, serves as the Trust's
transfer agent and dividend disbursing agent and provides certain accounting
services for the Fund. BISYS Ohio receives an annual fee of $14 per Variable
Contract Owner account, subject to certain per-Fund base fees, for its services
as transfer agent, and, for its services as fund accountant, BISYS Ohio receives
a fee, computed daily and paid periodically, at an annual rate equal to the
greater of 0.03% of average daily net assets or $30,000 for the Fund. Coopers &
Lybrand L.L.P. serves as independent auditors for the Trust. AmSouth is the
custodian of the Fund. See "MANAGEMENT OF THE TRUST" in the Statement of
Additional Information for further information.
While BISYS Ohio is a distinct legal entity from BISYS (the Trust's
administrator and distributor), BISYS Fund Services Ohio, Inc. is considered to
be an affiliated person of BISYS under the 1940 Act due to, among other things,
the fact that BISYS Ohio is owned by substantially the same persons that
directly or indirectly own BISYS.
Variable Contract Owner Servicing Agents
The Trust has adopted a plan under which up to 0.25% of the Fund's average daily
net assets may be expended to procure Variable Contract Owner services. Pursuant
to agreements with the Fund, certain financial institutions and their affiliates
serve as Variable Contract Owner Servicing Agents to the Fund. A Variable
Contract Owner Servicing Agent generally provides support services to its
clients who are Variable Contract Owners by establishing and maintaining
accounts and records, providing account information, arranging for bank wires,
responding to routine inquiries, forwarding Variable Contract Owner
communications, assisting in the processing of purchase, exchange and redemption
requests, and assisting Variable Contract Owners in changing account
designations and addresses. For expenses incurred and services provided, each
Variable Contract Owner Servicing Agent receives a fee from the Fund, computed
daily and paid monthly, at an annual rate of up to 0.25% of the average daily
net assets of the Fund allocable to Variable Contracts owned by customers of the
Variable Contract Owner Servicing Agent. A Variable Contract Owner Servicing
Agent may periodically waive all or a portion of its servicing fees with respect
to the Fund to increase the net income of the Fund available for distribution as
dividends.
<PAGE>
Expenses
AmSouth and the Administrator each bear all expenses in connection with the
performance of its services other than the cost of securities (including
brokerage commissions) purchased for the Trust. The Fund will bear the following
expenses relating to its operation: taxes, interest, fees of the Trustees of the
Trust, Securities and Exchange Commission fees, outside auditing and legal
expenses, advisory and administration fees, fees and out-of-pocket expenses of
the Custodian and fund accountant, certain insurance premiums, costs of
maintenance of the Trust's existence, costs of Shareholders' reports and
meetings, and any extraordinary expenses incurred in the Fund's operation.
Banking Laws
Federal banking laws and regulations presently prohibit a national bank or any
affiliate thereof from sponsoring, organizing or controlling a registered
open-end investment company continuously engaged in the issuance of its shares,
and generally from underwriting, selling or distributing securities, such as
Shares of the Fund.
AmSouth believes that it may perform advisory services for the Fund as described
herein and, provided that they do not engage in underwriting, selling or
distribution of the Fund's shares, its affiliates believe that they may perform
Variable Contract Owner servicing activities and may receive compensation
without violating federal banking laws and regulations.
In the event that, due to future events, AmSouth is prohibited from acting as an
investment adviser of the Fund, it is probable that the Board of Trustees would
either recommend to Shareholders the selection of another qualified adviser or,
if that course of action appeared impractical, that the Fund be liquidated.
Year 2000
The services provided to the Fund by AmSouth, BISYS, BISYS Ohio, and the Fund's
other service providers (collectively, the "Service Providers") are dependent on
those Service Providers' computer systems. Many computer software and hardware
systems in use today cannot distinguish between the year 2000 and the year 1900
because of the way dates are encoded and calculated (the "Year 2000 Issue"). The
failure to make this distinction could have a negative impact on the Service
Provider's ability to handle securities trades, price securities, and conduct
general account services on behalf of the Fund. The Trust is working with the
Service Providers to take steps that are reasonably designed to address the Year
2000 Issue with respect to computer systems relied on by the Fund. The Trust has
no reason to believe that these steps will not be sufficient to avoid any
material adverse impact on the Fund, although there can be no assurances. The
costs or consequences of an incomplete or an untimely resolution of the Year
2000 Issue are unknown to the Trust and the Service Providers at this time, but
could have a material adverse impact on the operations of the Fund and the
Service Providers.
<PAGE>
TAXATION
The Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). Accordingly, the Fund
generally will not be subject to federal income taxes to the extent that it
distributed on a timely basis its investment company taxable income and its net
capital gains.
To comply with regulations under section 817(h) of the Code, the Fund is
required to diversify its investments. Generally, the Fund will be required to
diversify its investments so that on the last day of each quarter of a calendar
year no more than 55% of the value of its total assets is represented by any one
investment, no more than 70% is represented by any two investments, no more than
80% is represented by any three investments, and no more than 90% is represented
by any four investments. For this purpose, securities of a given issuer
generally are treated as one investment, but each U.S. Government agency and
instrumentality is treated as a separate issuer. Any security issued,
guaranteed, or insured (to the extent so guaranteed or insured) by the U.S. or
an agency or instrumentality of the U.S. is treated as a security issued by the
U.S. Government or its agency or instrumentality, whichever is applicable.
Compliance with the diversification rules under Section 817(h) of the Code
generally will limit the ability of the Fund to invest greater than 55% of its
total assets in direct obligations of the U.S. Treasury (or any other issuer) or
to invest primarily in securities issued by a single agency or instrumentality
of the U.S. Government. If the Fund fails to meet the diversification
requirement under Section 817(h) of the Code, income with respect to Variable
Contracts invested in the Fund at any time during the calendar quarter in which
the failure occurred could become currently taxable to the owners of such
Variable Contracts and income for prior periods with respect to such contracts
also could be taxable, most likely in the year of the failure to achieve the
required diversification. Other adverse tax consequences could also ensue. If
the Fund failed to qualify as a regulated investment company, the results would
be substantially the same as a failure to meet the diversification requirements
under Section 817(h) of the Code.
The Treasury Department announced that it would issue future regulations or
rulings addressing the circumstances in which a variable contract owner's
control of the investments of the separate account may cause the contract owner,
rather than the insurance company, to be treated as the owner of the assets held
by the separate account. If the contract owner is considered the owner of the
securities underlying the separate account, income and gains produced by those
securities would be included currently in the contract owner's gross income. It
is not known what standards will be set forth in the regulations or rulings.
In the event that rules or regulations are adopted, there can be no assurance
that the Fund will be able to operate as currently described, or that the Trust
will not have to change the Fund's investment objective or investment policies.
While the Fund's investment objective is fundamental and may be changed only by
a vote of a majority of its outstanding Shares, the investment policies of the
Fund may be modified as necessary to prevent any such prospective rules and
regulations from causing Variable Contract Owners to be considered the owners of
the Shares of the Fund.
<PAGE>
Reference is made to the prospectus for the Separate Account and Variable
Contract for information regarding the federal income tax treatment of
distributions to the Separate Account. See "ADDITIONAL INFORMATION - Additional
Tax Information" in the Funds' Statement of Additional Information for more
information on taxes.
GENERAL INFORMATION
Description of the Trust and Its Shares
The Trust was organized as a Massachusetts business trust in 1994 and currently
consists of four portfolios. Each Share represents an equal proportionate
interest in the Fund with other Shares of the same Fund, and is entitled to such
dividends and distributions out of the income earned on the assets belonging to
the Fund as are declared at the discretion of the Trustees. Shares are without
par value. Shareholders are entitled to one vote for each dollar of value
invested and a proportionate fractional vote for any fraction of a dollar
invested. Shareholders will vote in the aggregate and not by Fund except as
otherwise expressly required by law.
An annual or special meeting of Shareholders to conduct necessary business is
not required by the Trust's Declaration of Trust, the 1940 Act or other
authority except, under certain circumstances, to elect Trustees, amend the
Declaration of Trust, approve an investment advisory agreement, and to satisfy
certain other requirements. To the extent that such a meeting is not required,
the Trust may elect not to have an annual or special meeting.
The Trust will call a special meeting of Shareholders for purposes of
considering the removal of one or more Trustees upon written request therefor
from Shareholders holding not less than 10% of the outstanding votes of the
Trust. At such a meeting, a quorum of Shareholders (constituting a majority of
votes attributable to all outstanding Shares of the Trust), by majority vote,
has the power to remove one or more Trustees. In accordance with current laws,
it is anticipated that an insurance company issuing a variable contract that
participates in the Fund will request voting instructions from variable contract
owners and will vote Shares or other voting interests in the separate account in
proportion of the voting instructions received. The Separate Account and
qualified pension and retirement plans are currently the only Shareholders of
the Fund, although other separate accounts of Hartford, or of other insurance
companies, may become Shareholders in the future.
Performance Information
From time to time performance information for the Fund showing its average
annual total return, aggregate total return and/or yield may be presented in
advertisements, sales literature and shareholder reports. Such performance
figures are based on historical earnings and are not intended to indicate future
performance. Average annual total return of its Fund will be calculated for the
period since the establishment of the Fund. Average annual total return is
measured by comparing the value of an investment in its Fund at the beginning of
the relevant period to the redemption value of the investment at the end of the
period (assuming immediate reinvestment of any dividends or capital gains
distributions and analyzing the result). Aggregate total return is calculated
similarly to average annual total return except that the return figure is
aggregated over the relevant period instead of annualized. Yield of the Fund
will be computed by dividing the net investment income per Share earned during a
recent one-month period by the per Share maximum offering price (reduced by any
undeclared earned income expected to be paid shortly as a dividend) on the last
day of the period and analyzing the result. Performance information for the Fund
will not be advertised or included in sales literature unless accompanied by
comparable performance information for the Separate Account.
<PAGE>
In addition, from time to time the Fund may present its distribution rates in
supplemental sales literature which is accompanied or preceded by a prospectus
and in Shareholder reports. Distribution rates will be computed by dividing the
distribution per Share made by the Fund over a twelve-month period by the
maximum offering price per Share. The calculation of income in the distribution
rate includes both income and capital gain dividends and does not reflect
unrealized gains or losses, although the Fund may also present a distribution
rate excluding the effect of capital gains. The distribution rate differs from
the yield, because it includes capital gains which are often non-recurring in
nature, whereas yield does not include such items.
Total return and yield are functions of the type and quality of instruments held
in the portfolio, operating expenses, and market conditions. Consequently, total
return and yield will fluctuate and are not necessarily representative of future
results. Quotations of yield or total return for the Fund will not take into
account charges or deductions against the Separate Account or Variable Contract
specific deductions for cost of insurance charges, premium load, administrative
fees, maintenance fees, premium tax, mortality and expense risks, or other
charges that may be incurred under a Variable Contract for which the Fund serves
as an underlying investment vehicle. The Fund's yield and total return should
not be compared with mutual funds that sell their shares directly to the public
since the figures provided do not reflect charges against the Separate Account
or the Variable Contracts. Performance information for the Fund reflects only
the performance of a hypothetical investment in the Fund during the particular
time period on which the calculations are based. In addition, if AmSouth or
BISYS voluntarily reduce all or a part of their respective fees, the total
return of the Fund will be higher than it would otherwise be in the absence of
such voluntary fee reductions.
Miscellaneous
Inquiries regarding the Trust may be directed in writing to the Trust at 3435
Stelzer Road, Columbus, Ohio 43219-3035, or by calling toll free (800) 257-5872.
No person has been authorized to give any information or to make any
representations not contained in this Prospectus in connection with the offering
made by this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Fund or
its Distributor. This Prospectus does not constitute an offering by the Fund or
by its Distributor in any jurisdiction in which such offering may not lawfully
be made.
<PAGE>
AmSouth Equity Income Fund
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
1-800-257-5872
Variable Insurance Funds (the "Trust") is an open-end management investment
company that currently offers four separate diversified investment portfolios,
each with different investment objectives and policies. This Prospectus
describes one of those portfolios, the AmSouth Equity Income Fund (the "Fund").
Additional information about the Trust and the Fund, contained in a Statement of
Additional Information dated May 1, 1998, as amended or supplemented, has been
filed with the Securities and Exchange Commission and is available upon request
without charge by writing to the Trust at its address or by calling the Trust at
the telephone number shown above. The Statement of Additional Information is
incorporated herein by reference.
The Fund currently sells its shares of beneficial interest ("Shares") to a
segregated asset account ("Separate Account") of Hartford Life Insurance Company
("Hartford") to serve as the investment medium for variable annuity contracts
("Variable Contracts") issued by Hartford. Shares of the Fund also may be sold
to qualified pension and retirement plans outside of the separate account
context. The Separate Account invests in Shares of the Fund in accordance with
allocation instructions received from owners of the Variable Contracts
("Variable Contract Owners"). Such allocation rights are described further in
the Separate Account prospectus.
Shares of the Fund are not deposits or obligations of, and are not endorsed,
insured or guaranteed by, any bank, the Federal Deposit Insurance Corporation,
or any other agency. An investment in the Fund involves investment risk,
including the possible loss of principal.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Investors should read this
Prospectus and retain it for future reference.
THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF THE
SEPARATE ACCOUNT. BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR
FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1998.
<PAGE>
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY
Shares Offered
Investment Objective
Investment Policies
Risk Factors and Special Considerations
Investment Adviser and Sub-Adviser
Other Information
FUND EXPENSES
FINANCIAL HIGHLIGHTS
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT TECHNIQUES AND RISK FACTORS
VALUATION OF SHARES
PURCHASING SHARES
REDEEMING SHARES
MANAGEMENT OF THE FUND
Trustees
Investment Adviser and Sub-Adviser
Administrator and Distributor
Other Service Providers
Variable Contract Owner Servicing Agents
Expenses
Banking Laws
Year 2000
TAXATION
GENERAL INFORMATION
Description of the Trust and Its Shares
Performance Information
Miscellaneous
<PAGE>
PROSPECTUS SUMMARY
Shares Offered . . . . . . . . . . Shares of the Fund, which is a diversified
investment portfolio of the Trust, a
Massachusetts business trust that is
registered as an open-end management
investment company. Shares of the Fund may be
offered in the future to other separate
accounts of Hartford, or to separate accounts
established by other affiliated or
unaffiliated insurance companies, to serve as
the underlying investment medium for variable
annuity and variable life insurance
contracts, which may pose certain risks
discussed under "PURCHASING SHARES."
Investment Objective. . . . . . . The Fund seeks to provide above average
income and capital appreciation.
Investment Policies . . . . . . . The Fund will, under normal market
conditions, invest at least 65% of its total
assets in income-producing equity securities,
including common stock, preferred stock and
securities convertible into common stocks,
such as convertible bonds and convertible
preferred stocks.
Risk Factors and Special
Considerations . . . . . . . . . An investment in the Fund involves a certain
amount of risk and may not be suitable for
all investors. See "INVESTMENT TECHNIQUES AND
RISK FACTORS."
Investment Adviser
and Sub-Adviser . . . . . AmSouth Bank ("AmSouth"), Birmingham,
Alabama, serves as investment adviser to the
Fund. Rockhaven Asset Management, LLC
("Rockhaven"), Pittsburgh, Pennsylvania,
serves as investment sub-adviser to the Fund.
See "MANAGEMENT OF THE FUND - Investment
Adviser and Sub-Adviser."
Other Information . . . . . . . . AmSouth is the custodian for the Fund. BISYS
Fund Services ("BISYS" or "Distributor" or
"Administrator") serves as the distributor
and administrator of the Fund. BISYS Fund
Services Ohio, Inc. ("BISYS Ohio") serves as
transfer agent and dividend disbursing agent
and provides certain accounting services for
the Trust.
<PAGE>
FUND EXPENSES
The following expense table indicates costs and expenses that an investor should
anticipate incurring either directly or indirectly as a Shareholder of the Fund
during the current fiscal year. The numbers reflect estimated levels of
operating expenses.
Annual Fund Operating Expenses
(as a percentage of average net assets annualized)
Management Fees After Waiver (1)...........................................0.25%
Other Expenses After Waiver and Reimbursements (1), (2)....................1.00%
Total Fund Operating Expenses After Waivers and Reimbursements(3)..........1.25%
- -------------------
1 AmSouth has undertaken to waive a portion of its investment advisory fee
and reimburse expenses to the extent that "Total Fund Operating Expenses"
for the Fund would exceed 1.25% of average daily net assets. Absent this
waiver, "Management Fees" as a percentage of the Fund's average daily net
assets would be 0.60%.
2 BISYS has agreed to waive a portion of its administrative fees. Absent this
waiver and expense reimbursements noted in 1 above, "Other Expenses" as a
percentage of the Fund's average daily net assets would be 6.66% (1.61%
based on average daily net assets at April 2, 1998).
3 Absent waivers and reimbursements, "Total Fund Operating Expenses" as a
percentage of the Fund's average daily net assets would be 7.26% (2.21%
based on average daily net assets at April 2, 1998).
The purpose of this table is to assist the prospective investor in understanding
the various costs and expenses that a Shareholder in the Fund will bear. The
following Example illustrates the expenses borne by Fund Shareholders.
Example
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return, and (2) redemption at the end of each time period:
1 Year............................................... $13
3 Years.............................................. $40
- ----------------
* This example should not be considered a representation of future
expenses, which may be more or less than those shown. The assumed 5%
annual return is hypothetical and should not be considered a
representation of past or future annual return. Actual return may be
greater or less than the assumed amount.
<PAGE>
FINANCIAL HIGHLIGHTS
The following table of selected financial information is included to assist
investors in evaluating the performance of the Fund since its commencement of
operations through December 31, 1997. This information has been audited by
Coopers & Lybrand L.L.P., the Trust's independent auditors, whose report on the
Fund's financial statements is included in the Fund's Annual Report, which may
be obtained without charge, and is incorporated by reference in the Trust's
Statement of Additional Information. The Annual Report also includes
Management's Discussion of Fund Performance. This information should be read in
conjunction with the Trust's financial statements relating to the Fund.
<TABLE>
<S> <C> <C>
October 23, 1997 through
For a Share outstanding throughout the period: December 31, 1997 (a)
---------------------------------------------
--------------------------
Net Asset Value, Beginning of Period $ 10.00
-----------------------
Investment Activities:
Net investment income 0.03
Net realized and unrealized gains from investments 0.23
-----------------------
Total from investment activities 0.26
-----------------------
Distributions:
Net investment income (0.03)
-----------------------
Total distributions (0.03)
-----------------------
Net Asset Value, End of Period $ 10.23
=======================
Total Return 2.27%(b)
Ratios/Supplementary Data:
Net assets, at end of period (000) $ 2,387
Ratio of expenses to average net assets 1.22%(c)
Ratio of net investment income to average net 2.39%(c)
assets
Ratio of expenses to average net assets* 7.26%(c)
Ratio of net investment income to average net (3.65)%(c)
assets*
Portfolio turnover 4.00%
Average commission rate paid $ 0.06(d)
</TABLE>
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Represents the dollar amount of commissions paid on portfolio transactions
divided by total number of shares purchased and sold by the Fund for which
commissions were charged.
* During the period, certain fees were reimbursed and voluntarily reduced. If
such reimbursements and voluntary fee reductions had not occurred, the
ratios would have been as indicated.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Shareholders should be aware that the investments made by the Fund at any given
time are not expected to be the same as those made by other mutual funds for
which AmSouth or Rockhaven acts as investment adviser, including mutual funds
with names, investment objectives and policies similar to the Fund. Investors
should carefully consider their investment goals and willingness to tolerate
investment risk before allocating their investment to the Fund.
The Fund seeks to provide above average income and capital appreciation. Under
normal market conditions, the Fund invests at least 65% of its total assets in
income-producing equity securities, including common stock, preferred stock, and
securities convertible into common stocks, such as convertible bonds and
convertible preferred stocks. The Fund's stock selection emphasizes those common
stocks in each sector that have good value, attractive yield, and dividend
growth potential. The portion of the Fund's total assets invested in common
stock, preferred stock, and convertible securities varies according to the
Fund's assessment of market and economic conditions and outlook. Most companies
in which the Fund invests are listed on national securities exchanges.
Rockhaven seeks to invest in equity securities which are believed to represent
investment value. Factors which may be considered in selecting equity securities
include industry and company fundamentals, historical price relationships,
and/or underlying asset value.
Under normal market conditions, the Fund may also invest up to 35% of the value
of its total assets in corporate bonds, mortgage-related and asset-backed
securities, real estate investment trusts, notes, money market mutual funds,
warrants, and obligations with maturities of 12 months or less such as
commercial paper (including variable amount master demand notes), bankers'
acceptances, obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, and demand and time deposits of domestic and
foreign banks and savings and loan associations. The Fund may also write covered
call options. If deemed appropriate for temporary defensive purposes, the Fund
may increase its holdings in short-term obligations up to 100% of its total
assets and may also hold uninvested cash pending investment. See "INVESTMENT
TECHNIQUES AND RISK FACTORS."
* * * *
The investment objective of the Fund is a fundamental policy and as such may not
be changed without a vote of the holders of a majority of the outstanding Shares
of the Fund. Other policies of the Fund may be changed without a vote of the
holders of a majority of outstanding Shares of the Fund unless (i) the policy is
expressly deemed to be a fundamental policy or (ii) the policy is expressly
deemed to be changeable only by such majority vote. There can be no assurance
that the investment objective of the Fund will be achieved.
<PAGE>
INVESTMENT TECHNIQUES AND RISK FACTORS
Like any investment program, an investment in the Fund entails certain risks.
Convertible Securities
Convertible securities are fixed income securities that may be exchanged or
converted into a predetermined number of the issuer's underlying common stock at
the option of the holder during a specified time period. Convertible securities
may take the form of convertible preferred stock, convertible bonds or
debentures, units consisting of "usable" bonds and warrants or a combination of
the features of several of these securities. The Fund may invest in convertible
securities that are rated "BB" by Standard & Poor's Rating Services ("S&P") and
"Ba" by Moody's Investors Service, Inc. ("Moody's"), or lower, at the time of
investment, or if unrated, are of comparable quality. The investment
characteristics of each convertible security vary widely, which allows
convertible securities to be employed for different investment objectives.
Securities which are rated "BB" or lower by S&P or "Ba" or lower by Moody's
either have speculative characteristics or are speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the
obligations. There is no lower limit with respect to rating categories for
convertible securities in which the Fund may invest.
Corporate debt obligations are "investment grade" if they are rated "BBB" or
higher by S&P or "Baa" or higher by Moody's or, if unrated, are determined to be
of comparable quality. Debt obligations that are not determined to be investment
grade are high yield, high risk bonds, typically subject to greater market
fluctuations and greater risk of loss of income and principal due to an issuer's
default. To a greater extent than investment grade securities, lower rated
securities tend to reflect short-term corporate, economic and market
developments, as well as investor perceptions or the issuer's credit quality.
Because investments in lower rated securities involve greater investment risk,
achievement of the Fund's investment objective may be more dependent on
Rockhaven's credit analysis than would be the case if the Fund were investing in
higher rated securities. High yield securities may be more susceptible to real
or perceived adverse economic and competitive industry conditions than
investment grade securities. A projection of an economic downturn, for example,
could cause a decline in high yield prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities. In addition, the secondary trading
market for high yield securities may be less liquid than the market for higher
grade securities. The market prices of debt securities also generally fluctuate
with changes in interest rates so that the Fund's net asset value can be
expected to decrease as long-term interest rates rise and to increase as
long-term rates fall. In addition, lower rated securities may be more difficult
to dispose of or to value than high-rated, lower-yielding securities. Rockhaven
attempts to reduce the risks described above through diversification of the
Fund's portfolio and by credit analysis of each issuer as well as by monitoring
broad economic trends and corporate and legislative developments.
Convertible bonds and convertible preferred stocks are fixed income securities
that generally retain the investment characteristics of fixed income securities
until they have been converted but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed income of a bond
or the dividend preference of a preferred stock until the holder elects to
exercise the conversion privilege. Usable bonds are corporate bonds that can be
used in whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock. When owned as part of a unit along with
warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before the
bond's maturity. Convertible securities are senior to equity securities, and,
therefore, have a claim to assets of the corporation prior to the holders of
common stock in the case of liquidation. However, convertible securities are
generally subordinated to similar non-convertible securities of the same
company. The interest income and dividends from convertible bonds and preferred
stocks provide a stream of income with generally higher yields than common
stocks, but lower than non-convertible securities of similar quality.
<PAGE>
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which, in
the opinion of Rockhaven, the investment characteristics of the underlying
common shares will assist the Fund in achieving its investment objective.
Otherwise, the Fund will hold or trade the convertible securities. In selecting
convertible securities for the Fund, Rockhaven evaluates the investment
characteristics of the convertible security as a fixed income instrument, and
the investment potential of the underlying equity security for capital
appreciation. In evaluating these matters with respect to a particular
convertible security, Rockhaven considers numerous factors, including the
economic and political outlook, the value of the security relative to other
investment alternatives, trends in the determinants of the issuer's profits, and
the issuer's management capability and practices.
As with all fixed income securities, the market values of convertible securities
tend to increase when interest rates decline and, conversely, tend to decline
when interest rates increase.
Put and Call Options
The Fund may write covered call options (options on securities or currencies
owned by the Fund). When a portfolio security or currency subject to a call
option is sold, the Fund will effect a "closing purchase transaction"--the
purchase of a call option on the same security or currency with the same
exercise price and expiration date as the call option which the Fund previously
has written. If the Fund is unable to effect a closing purchase transaction, it
will not be able to sell the underlying security or currency until the option
expires or the Fund delivers the underlying security or currency upon exercise.
In addition, upon the exercise of a call option by the holder thereof, the Fund
will forego the potential benefit represented by market appreciation over the
exercise price. Under normal conditions, it is not expected that the Fund will
cause the underlying value of portfolio securities and/or currencies subject to
such options to exceed 25% of its total assets.
Foreign Securities
The Fund may invest in foreign securities through the purchase of American
Depository Receipts ("ADRs") or the purchase of securities of the Toronto Stock
Exchange, but will not do so if immediately after a purchase and as a result of
the purchase the total value of such foreign securities owned by the Fund would
exceed 25% of the value of the total assets of the Fund. The Fund may also
invest in securities issued by foreign branches of the U.S. banks and foreign
banks and in Canadian Commercial Paper and Europaper, which is U.S. dollar
denominated commercial paper of a foreign issuer.
<PAGE>
Investment in foreign securities is subject to special investment risks that
differ in some respects from those related to investments in securities of U.S.
domestic issuers. Such risks include political, social or economic instability
in the country of the issuer, the difficulty of predicting international trade
patterns, the possibility of the imposition of exchange controls, expropriation,
limits on removal of currency or other assets, nationalization of assets,
foreign withholding and income taxation, and foreign trading practices
(including higher trading commissions, custodial charges and delayed
settlements). Such securities may be subject to greater fluctuations in price
than securities issued by U.S. corporations or issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. The markets on which such
securities trade may have less volume and liquidity, and may be more volatile
than securities markets in the U.S. In addition, there may be less publicly
available information about a foreign company than about a U.S. domiciled
company. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
U.S. domestic companies. There is generally less government regulation of
securities exchanges, brokers and listed companies abroad than in the U.S.
Confiscatory taxation or diplomatic developments could also affect investment in
those countries. In addition, foreign branches of U.S. banks, foreign banks and
foreign issuers may be subject to less stringent reserve requirements and to
different accounting, auditing, reporting, and recordkeeping standards than
those applicable to domestic branches of U.S. banks and U.S. domestic issuers.
If a security is denominated in foreign currency, the value of the security to
the Fund will be affected by changes in currency exchange rates and in exchange
control regulations, and costs will be incurred in connection with conversions
between currencies. Currency risks generally increase in lesser developed
markets. Exchange rate movements can be large and can endure for extended
periods of time, affecting either favorably or unfavorably the Fund's assets.
For many foreign securities, U.S. dollar denominated ADRs, which are traded in
the United States on exchanges or over-the-counter, are issued by domestic
banks. ADRs represent the right to receive securities of foreign issuers
deposited in a domestic bank or a correspondent bank. ADRs do not eliminate all
the risk inherent in investing in the securities of foreign issuers' stock.
However, by investing in ADRs rather than directly in foreign issuers' stock,
the Fund can avoid currency risks during the settlement period for either
purchase or sales.
Unsponsored ADR programs are organized independently and without the cooperation
of the issuer of the underlying securities. As a result, available information
concerning the issuers may not be as current as for sponsored ADRs, and the
prices of unsponsored depository receipts may be more volatile than if such
instruments were sponsored by the issuer.
Foreign Currency Transactions
The value of the assets of the Fund as measured in U.S. dollars may be affected
favorably or unfavorably by changes in foreign currency exchange rates and
exchange control regulations, and the Fund may incur costs in connection with
conversions between various currencies. The Fund will conduct its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market, or through forward
contracts to purchase or sell foreign currencies. A forward foreign currency
exchange contract ("forward currency contract") involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These forward currency contracts are
traded directly between currency traders (usually large commercial banks) and
their customers. The Fund may enter into forward currency contracts in order to
hedge against adverse movements in exchange rates between currencies.
<PAGE>
By entering into a forward currency contract in U.S. dollars for the purchase or
sale of the amount of foreign currency involved in an underlying security
transaction, the Fund is able to protect itself against a possible loss between
trade and settlement dates resulting from an adverse change in the relationship
between the U.S. dollar and such foreign currency. However, this tends to limit
potential gains which might result from a positive change in such currency
relationships. The Fund may also hedge its foreign currency exchange rate risk
by engaging in currency financial futures and options transactions. The
forecasting of short-term currency market movements is extremely difficult and
whether such a short-term hedging strategy will be successful is highly
uncertain.
It is impossible to forecast with precision the market value of portfolio
securities at the expiration of a forward currency contract. Accordingly, it may
be necessary for the Fund to purchase additional currency on the spot market if
the market value of the security is less than the amount of foreign currency the
Fund is obligated to deliver when a decision is made to sell the security and
make delivery of the foreign currency in settlement of a forward contract.
Conversely, it may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security if its market value
exceeds the amount of foreign currency the Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, it will incur a gain or a loss to the extent that there has been
movement in forward currency contract prices. If the Fund engages in an
offsetting transaction, it may subsequently enter into a new forward currency
contract to sell the foreign currency. Although such contracts tend to minimize
the risk of loss due to a decline in the value of the hedged currency, they also
tend to limit any potential gain which might result should the value of such
currency increase. The Fund will have to convert its holdings of foreign
currencies into U.S. dollars from time to time. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies.
Medium-Grade Securities
The Fund may invest up to 10% of its total assets in debt securities within the
fourth highest rating group assigned by a nationally recognized statistical
rating organization ("NRSRO") (i.e., BBB or Baa by S&P and Moody's,
respectively) and comparable unrated securities. This limitation does not apply
to convertible securities, which are discussed above. These types of debt
securities are considered by Moody's and S&P to have some speculative
characteristics, and are more vulnerable to changes in economic conditions,
higher interest rates or adverse issuer-specific developments which are more
likely to lead to a weaker capacity to make principal and interest payments than
comparable higher rated debt securities.
<PAGE>
Should subsequent events cause the rating of a debt security purchased by the
Fund to fall below BBB or Baa, as the case may be, Rockhaven will consider such
an event in determining whether the Fund should continue to hold that security.
In no event, however, would the Fund be required to liquidate any such portfolio
security where the Fund would suffer a loss on the sale of such security.
Mortgage-Related and Asset-Backed Securities
Investments in these and other derivative securities will not be made for
purposes of leverage or speculation, but rather primarily for conventional
investment or hedging purposes, liquidity, flexibility and to capitalize on
market inefficiencies. Consistent with its investment objective, restrictions
and policies, the Fund may invest in mortgage-related securities, which are
securities representing interests in "pools" of mortgages in which payments of
both interest and principal on the securities are made monthly.
Early repayment of principal on mortgage-related securities may expose the Fund
to a lower rate of return upon reinvestment of principal. Like other fixed
income securities, when interest rates rise, the value of a mortgage-related
security generally will decline; however, when interest rates decline, the value
of mortgage-related securities with prepayment features may not increase as much
as other fixed income securities. For this and other reasons, the stated
maturity of a mortgage-related security may be shortened by unscheduled
prepayments on the underlying mortgages. Alternatively, the rate of prepayments
on underlying mortgages may have the effect of extending the effective maturity
of the security beyond what was anticipated at the time of purchase. To the
extent that unanticipated rates of prepayment on underlying mortgages increase
the effective maturity of a mortgage-related security, the volatility of such
security can be expected to increase. Accordingly, it may not possible to
predict accurately a security's return to the Fund.
Like mortgages underlying mortgage-backed securities, automobile sales contracts
or credit card receivables underlying asset-backed securities are subject to
prepayment, which may reduce the overall return to certificate holders.
Nevertheless, principal prepayment rates tend not to vary much with interest
rates, and the short-term nature of the underlying car loans or other
receivables tends to dampen the impact of any change in the prepayment level.
Certificate holders may also experience delays in prepayment on the certificates
if the full amounts due on underlying sales contracts or receivables are not
realized because of unanticipated legal or administrative costs of enforcing the
contracts or because of depreciation or damage to the collateral (usually
automobiles) securing certain contracts, or other factors. In certain market
conditions, asset-backed securities may experience volatile fluctuations in
value and periods of illiquidity. If consistent with its investment objective
and policies, the Fund may invest in other asset-backed securities that may be
developed in the future.
Certain issuers of asset-backed securities are considered to be investment
companies under the Investment Company Act of 1940 (the "1940 Act"). The Fund
intends to conduct its operations so that it will invest its assets (when
combined with investments in securities of other investment companies, if any)
in the obligations of such issuers within applicable regulatory limits.
<PAGE>
U.S. Government Obligations
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; still others are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. Government would
provide financial support to U.S. Government-sponsored agencies or
instrumentalities if it is not obligated to do so by law.
The Stripped Treasury Obligations in which the Fund may invest do not include
Certificates of Accrual on Treasury Securities ("CATS") or Treasury Income
Growth Receipts ("TIGRs"). 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.
Bankers' Acceptances
The Fund may invest in bankers' acceptances guaranteed by domestic and foreign
banks if at the time of investment the guarantor bank has capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of its most recently
published financial statements).
Certificates of Deposit and Time Deposits
The Fund may invest in certificates of deposit and time deposits of domestic and
foreign banks and savings and loan associations if (a) at the time of investment
the depository institution has capital, surplus, and undivided profits in excess
of $100,000,000 (as of the date of its most recently published financial
statements), or (b) the principal amount of the instrument is insured in full by
the Federal Deposit Insurance Corporation.
Commercial Paper
The Fund may, within the limitations described above, invest in short-term
promissory notes (including variable amount master demand notes) issued by
corporations and other entities, such as municipalities, rated at the time of
purchase within the two highest categories assigned by an NRSRO (e.g., A-2 or
better by S&P, Prime-2 or better by Moody's) or, if not rated, determined to be
of comparable quality to instruments that are so rated. The Fund may also invest
in Canadian Commercial Paper, which is commercial paper issued by a Canadian
corporation or a Canadian counterpart of a U.S. corporation, and in Europaper,
which is U.S. dollar denominated commercial paper of a foreign issuer.
The Fund may invest in variable amount master demand notes, which are unsecured
demand notes that permit the indebtedness thereunder to vary, and that provide
for periodic adjustments in the interest rate according to the terms of the
instrument. Although there is no secondary market in the notes, the 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. Rockhaven will consider the earning power, cash flow, and
other liquidity ratios of the issuers of such notes and will continuously
monitor their financial status and ability to meet payment on demand. A note
will be deemed to have a maturity equal to the period of time remaining until
the principal amount can be recovered from the issuer through demand. The period
of time remaining until the principal amount can be recovered under a variable
master demand note shall not exceed seven days.
<PAGE>
Repurchase Agreements
Securities held by the Fund may be subject to repurchase agreements. Under the
terms of a repurchase agreement, the Fund would acquire securities from
financial institutions, subject to the seller's agreement to repurchase such
securities at a mutually agreed upon date and price, which includes interest
negotiated on the basis of current short-term rates. The seller under a
repurchase agreement will be required to maintain at all times the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest). If a seller defaults on its repurchase agreements,
the Fund may suffer a loss in disposing of the security subject to the
repurchase agreement. For further information about repurchase agreements, see
"INVESTMENT OBJECTIVES AND POLICIES--Additional Information on Portfolio
Instruments--Repurchase Agreements" in the Statement of Additional Information.
Reverse Repurchase Agreements and Dollar Roll Agreements
The Fund may borrow funds by entering into reverse repurchase agreements and
dollar roll agreements. Pursuant to such reverse repurchase agreements, the Fund
would sell certain of its securities to financial institutions such as banks and
broker-dealers, and agree to repurchase them, or substantially similar
securities in the case of a dollar roll agreement, at a mutually agreed upon
date and price. A dollar roll agreement is analogous to a reverse repurchase
agreement, with the Fund selling mortgage-backed securities for delivery in the
current month and simultaneously contracting to repurchase substantially similar
(same type, coupon and maturity) securities on a specified future date. At the
time the Fund enters into a reverse repurchase agreement or dollar roll
agreement, it will place in a segregated custodial account assets such as U.S.
Government securities or other liquid securities consistent with its investment
restrictions having a value equal to the repurchase price (including accrued
interest), and will subsequently continually monitor the account to ensure that
such equivalent value is maintained at all times. Reverse repurchase agreements
and dollar roll agreements involve the risk that the market value of securities
to be purchased by the Fund may decline below the price at which it is obligated
to repurchase the securities, or that the other party may default on its
obligation, so that the Fund is delayed or prevented from completing the
transaction.
When-Issued and Delayed-Delivery Transactions
The Fund may purchase securities on a when-issued or delayed-delivery basis. The
Fund will engage in when-issued and delayed-delivery transactions only for the
purpose of acquiring portfolio securities consistent with its investment
objective and policies, not for investment leverage. When-issued securities are
securities purchased for delivery beyond the normal settlement date at a stated
price and yield and thereby involve a risk that the yield obtained in the
transaction will be less than that available in the market when delivery takes
place. The Fund will not pay for such securities or start earning interest on
them until they are received. When the Fund agrees to purchase such securities,
its Custodian will set aside cash or liquid securities equal to the amount of
the commitment in a segregated account. In when-issued and delayed-delivery
transactions, the Fund relies on the seller to complete the transaction; the
seller's failure to do so may cause the Fund to miss a price or yield considered
to be advantageous.
<PAGE>
Lending of Portfolio Securities
In order to generate additional income, the Fund may from time to time lend
portfolio securities to broker-dealers, banks or institutional borrowers of
securities. The Fund must receive 100% collateral, in the form of cash or U.S.
Government securities. This collateral must be valued daily, and should the
market value of the loaned securities increase, the borrower must furnish
additional collateral to the lender. During the time portfolio securities are on
loan, the borrower pays the lender any dividends or interest paid on such
securities. Loans are subject to termination by the lender or the borrower at
any time. While the Fund does not have the right to vote securities on loan, it
intends to terminate the loan and regain the right to vote if that is considered
important with respect to the investment. In the event the borrower defaults on
its obligation to the Fund, the lender could experience delays in recovering its
securities and possible capital losses. The Fund will only enter into loan
arrangements with broker-dealers, banks or other institutions determined to be
creditworthy under guidelines established by the Board of Trustees that permit
the Fund to loan up to 33 1/3% of the value of its total assets.
Short-Term Obligations
The Fund may invest in high quality, short-term obligations (with maturities of
12 months or less) such as domestic and foreign commercial paper (including
variable amount master demand notes), bankers' acceptances, certificates of
deposit and demand and time deposits of domestic and foreign branches of U.S.
banks and foreign banks, and repurchase agreements, in order to acquire interest
income combined with liquidity. Such investments will be limited to those
obligations which, at the time of purchase, (i) possess one of the two highest
short-term ratings from NRSROs or (ii) do not possess a rating (i.e., are
unrated) but are determined to be of comparable quality to rated instruments
eligible for purchase. Under normal market conditions, the Fund will limit its
investment in short-term obligations to 35% of its total assets. For temporary
defensive purposes, as determined by Rockhaven, these investments may constitute
100% of the Fund's portfolio and, in such circumstances, will constitute a
temporary suspension of the Fund's attempts to achieve its investment objective.
Short-Term Trading
In order to generate income, the Fund may engage in the technique of short-term
trading. Such trading involves the selling of securities held for a short time,
ranging from several months to less than a day. The object of such short-term
trading is to increase the potential for capital appreciation and/or income of
the Fund in order to take advantage of what Rockhaven believes are changes in
market, industry or individual company conditions or outlook. Any such trading
would increase the portfolio turnover rate of the Fund and its transaction
costs.
<PAGE>
Securities Issued by Other Investment Companies
The Fund may invest up to 10% of its total assets in shares of money market
mutual funds for cash management purposes. The Fund will incur additional
expenses due to the duplication of expense as a result of investing in other
investment companies.
Real Estate Investment Trusts
The Fund may invest in real estate investment trusts. Real estate investment
trusts are sensitive to factors such as changes in real estate values and
property taxes, interest rates, cash flow of underlying real estate assets,
overbuilding, and the management skill and creditworthiness of the issuer. Real
estate may also be affected by tax and regulatory requirements, such as those
relating to the environment.
Restricted Securities
Securities in which the Fund may invest include securities issued by
corporations without registration under the Securities Act of 1933, as amended
(the "1933 Act"), in reliance on the so-called "private placement" exemption
from registration which is afforded by Section 4(2) of the 1933 Act ("Section
4(2) securities"). Section 4(2) securities are restricted as to disposition
under the federal securities laws, and generally are sold to institutional
investors such as the Fund who agree that they are purchasing the securities for
investment and not with a view to public distribution. Any resale must also
generally be made in an exempt transaction. Section 4(2) securities are normally
resold to other institutional investors through or with the assistance of the
issuer or investment dealers who make a market in such Section 4(2) securities,
thus providing liquidity. Pursuant to procedures adopted by the Board of
Trustees of the Trust, Rockhaven may determine Section 4(2) securities to be
liquid if such securities are readily marketable. These securities may include
securities eligible for resale under Rule 144A under the 1933 Act.
VALUATION OF SHARES
The net asset value of the Fund is determined and its Shares are priced as of
the closing of the New York Stock Exchange, Inc. ("NYSE") (generally 4:00 p.m.
Eastern Time) on each Business Day ("Valuation Time"). As used herein, Business
Day is a day on which the NYSE is open for trading, and any other day except
days on which there are insufficient changes in the value of the Fund's
portfolio securities to materially affect the Fund's net asset value or days on
which no Shares are tendered for redemption and no order to purchase any Shares
is received. Currently, the NYSE is closed on the following holidays: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas.
Net asset value per Share for purposes of pricing sales and redemptions is
calculated by dividing the value of all securities and other assets belonging to
the Fund, less the liabilities charged to the Fund and any liabilities allocable
to the Fund, by the number of the Fund's outstanding Shares. The net asset value
per Share of the Fund will fluctuate as the value of the investment portfolio of
the Fund changes.
<PAGE>
The securities in the Fund will be valued at market value. If market quotations
are not available, the securities will be valued by a method which the Board of
Trustees believes accurately reflects fair value. For further information about
valuation of investments, see "NET ASSET VALUE" in the Statement of Additional
Information.
PURCHASING SHARES
As of the date of this Prospectus, Shares of the Fund are offered for purchase
by the Separate Account to serve as an investment medium for the Variable
Contracts issued by Hartford, and to qualified pension and retirement plans
outside of the separate account context. Shares of the Fund may be offered in
the future to other separate accounts established by or sold to separate
accounts of other affiliated or unaffiliated insurance companies, and may be
offered in the future to serve as an investment medium for variable life
insurance policies.
While the Fund currently does not foresee any disadvantages to Variable Contract
Owners if the Fund serves as an investment medium for both variable annuity
contracts and variable life insurance policies, due to differences in tax
treatment or other considerations, it is theoretically possible that the
interest of owners of annuity contracts and insurance policies for which the
Fund served as an investment medium might at some time be in conflict. However,
the Trust's Board of Trustees and each insurance company with a separate account
allocating assets to the Fund would be required to monitor events to identify
any material conflicts between variable annuity contract owners and variable
life insurance policy owners, and would have to determine what action, if any
should be taken in the event of such a conflict. If such a conflict occurred, an
insurance company participating in the Fund might be required to redeem the
investment of one or more of its separate accounts from the Fund, which might
force the Fund to sell securities at disadvantageous prices.
Shares of the Fund are purchased at the net asset value per Share (see
"VALUATION OF SHARES") next determined after receipt by the Distributor of an
order to purchase Shares. Purchases of Shares of the Fund will be effected only
on a Business Day of the Fund. An order received prior to the Valuation Time on
any Business Day will be executed at the net asset value determined as of the
Valuation Time on the date of receipt. An order received after the Valuation
Time on any Business Day will be executed at the net asset value determined as
of the Valuation Time on the next Business Day of the Fund.
The Fund reserves the right to discontinue offering Shares at any time. In the
event that the Fund ceases offering its Shares, any investments allocated to the
Fund will, subject to any necessary regulatory approvals, be invested in another
portfolio of the Trust deemed appropriate by the Trustees.
REDEEMING SHARES
Shares may be redeemed without charge on any day that net asset value is
calculated (see "VALUATION OF SHARES"). All redemption orders are effected at
the net asset value per Share next determined after receipt by the Distributor
of a redemption request. Payment for Shares redeemed normally will be made
within seven days.
<PAGE>
The Trust intends to pay cash for all Shares redeemed, but under abnormal
conditions which make payment in cash unwise, payment may be made wholly or
partly in portfolio securities at their then market value equal to the
redemption price. In such cases, a Shareholder may incur brokerage costs in
converting such securities to cash.
See the Statement of Additional Information ("ADDITIONAL PURCHASE AND REDEMPTION
INFORMATION") for examples of when the right of redemption may be suspended.
Variable Contract Owners do not deal directly with the Fund to purchase or
redeem Shares, and Variable Contract Owners should refer to the prospectus for
the Separate Account for information on the allocation of premiums and on
transfers of accumulated value among sub-accounts of the Separate Account that
invests in the Fund.
MANAGEMENT OF THE FUND
Trustees
Overall responsibility for management of the Trust rests with its Board of
Trustees. The Trust will be managed by the Trustees in accordance with the laws
of the Commonwealth of Massachusetts governing business trusts. The Trustees, in
turn, elect the officers of the Trust to supervise its day-to-day operations.
Investment Adviser and Sub-Adviser
AmSouth. AmSouth is the investment adviser of the Fund. AmSouth is the principal
bank affiliate of AmSouth Bancorporation, one of the largest banking
institutions headquartered in the mid-south region. AmSouth Bancorporation
reported assets as of September 30, 1997 of $18.1 billion and operated 272
banking offices and over 600 ATM locations in Alabama, Florida, Georgia and
Tennessee. AmSouth has provided investment management services through its Trust
Investment Department since 1915. As of September 30, 1997, AmSouth and its
affiliates had over $8.2 billion in assets under discretionary management and
provided custody services for an additional $20.5 billion in securities.
AmSouth, whose principal business address is 1901 Sixth Avenue North,
Birmingham, Alabama 35203, is the largest provider of trust services in Alabama.
AmSouth serves as administrator for over $12 billion in bond issues, and its
Trust Natural Resources and Real Estate Department is a major manager of
timberland, mineral, oil and gas properties and other real estate interests.
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the investment objective and restrictions of the Fund, AmSouth
is authorized to manage the Fund, make decisions with respect to and place
orders for all purchases and sales of its investment securities, and maintain
its records relating to such purchases and sales.
Under an investment advisory agreement between the Trust and AmSouth, the fee
payable to AmSouth by the Fund for investment advisory services is the lesser of
(a) a fee computed daily and paid monthly at the annual rate of 0.60% of the
Fund's daily net assets or (b) such fee as may from time to time be agreed upon
in writing by the Trust and AmSouth. A fee agreed to in writing from time to
time by the Trust and AmSouth may be lower than the fee calculated at the
contractual annual rate and the effect of such lower fee would be to lower the
Fund's expenses and increase the net income of the Fund during the period when
such lower fee is in effect. For services provided and expenses assumed during
the fiscal period ended December 31, 1997, AmSouth waived its entire investment
advisory fee payable from the Fund.
<PAGE>
Rockhaven. Rockhaven serves as investment sub-adviser to the Fund pursuant to a
sub-advisory agreement with AmSouth. Under the sub-advisory agreement, Rockhaven
manages the Fund, selects investments and places all orders for purchases and
sales of securities, subject to the general supervision of the Trust's Board of
Trustees and AmSouth in accordance with the Fund's investment objective,
policies and restrictions.
Rockhaven is 50% owned by AmSouth and 50% owned by Mr. Christopher H. Wiles.
Rockhaven was organized in 1997 to perform advisory services for investment
companies and has its principal offices at 100 First Avenue, Suite 1050,
Pittsburgh, PA 15222.
For its services and expenses incurred under the sub-advisory agreement,
Rockhaven is entitled to a fee payable by AmSouth. The fee is computed daily and
paid monthly at an annual rate of 0.36% of the Fund's average daily net assets
or such lower fee as may be agreed upon in writing by AmSouth and Rockhaven,
provided that if AmSouth waives a portion of its investment advisory fee,
Rockhaven has agreed that its sub-advisory fee shall not exceed 60% of AmSouth's
net investment advisory fee. For the fiscal period ended December 31, 1997, no
sub-advisory fees were paid by AmSouth to Rockhaven.
Mr. Wiles is the portfolio manager for the Fund, and, as such, has the primary
responsibility for the day-to-day portfolio management of the Fund. Mr. Wiles is
the President and Chief Investment Officer of Rockhaven. From May, 1991 to
January, 1997, he was portfolio manager of the Federated Equity Income Fund.
Administrator and Distributor
BISYS, 3435 Stelzer Road, Columbus, Ohio 43219-3035, a division of BISYS Group,
Inc., is the administrator for the Fund, and also acts as the Trust's principal
underwriter and distributor.
The Administrator generally assists in all aspects of the Fund's administration
and operation. For expenses assumed and services provided as administrator
pursuant to its Management and Administration Agreement with the Trust, the
Administrator receives a fee from the Fund equal to the lesser of a fee,
computed daily and paid periodically, at the annual rate of 0.20% of the Fund's
average daily net assets, or such other fee as may be agreed upon from time to
time by the Trust and the Administrator. The Administrator may periodically
voluntarily reduce all or a portion of its administrative fee with respect to
the Fund to increase the net income of the Fund available for distribution as
dividends. The voluntary fee reduction will cause the yield of the Fund to be
higher than it would otherwise be in the absence of such a reduction.
The Distributor acts as agent for the Fund in the distribution of its Shares
and, in such capacity, advertises and pays the cost of advertising, office space
and its personnel involved in such activities. The Distributor serves in such
capacity without remuneration from the Fund.
<PAGE>
Other Service Providers
BISYS Ohio, 3435 Stelzer Road, Columbus, Ohio 43219-3035, serves as the Trust's
transfer agent and dividend disbursing agent and provides certain accounting
services for the Fund. BISYS Ohio receives an annual fee of $14 per Variable
Contract Owner account, subject to certain per-Fund base fees, for its services
as transfer agent, and, for its services as fund accountant, BISYS Ohio receives
a fee, computed daily and paid periodically, at an annual rate equal to the
greater of 0.03% of the Fund's average daily net assets or $30,000.
Coopers & Lybrand L.L.P. serves as independent auditors for the Trust. AmSouth
is the custodian of the Fund. See "MANAGEMENT OF THE TRUST" in the Statement of
Additional Information for further information.
While BISYS Ohio is a distinct legal entity from BISYS (the Trust's
administrator and distributor), BISYS Ohio is considered to be an affiliated
person of BISYS under the 1940 Act due to, among other things, the fact that
BISYS Ohio is owned by substantially the same persons that directly or
indirectly own BISYS.
Variable Contract Owner Servicing Agents
The Trust has adopted a plan under which up to 0.25% of the Fund's average daily
net assets may be expended to procure Variable Contract Owner services. Pursuant
to agreements with the Fund, certain financial institutions and their affiliates
serve as Variable Contract Owner Servicing Agents to the Fund. A Variable
Contract Owner Servicing Agent generally provides support services to its
clients who are Variable Contract Owners by establishing and maintaining
accounts and records, providing account information, arranging for bank wires,
responding to routine inquiries, forwarding Variable Contract Owner
communications, assisting in the processing of purchase, exchange and redemption
requests, and assisting Variable Contract Owners in changing account
designations and addresses. For expenses incurred and services provided, each
Variable Contract Owner Servicing Agent receives a fee from the Fund, computed
daily and paid monthly, at an annual rate of up to 0.25% of the average daily
net assets of the Fund allocable to Variable Contracts owned by customers of the
Variable Contract Owner Servicing Agent. A Variable Contract Owner Servicing
Agent may periodically waive all or a portion of its servicing fees with respect
to the Fund to increase the net income of the Fund available for distribution as
dividends.
Expenses
AmSouth, Rockhaven, and the Administrator each bear all expenses in connection
with the performance of its services other than the cost of securities
(including brokerage commissions) purchased for the Trust. The Fund will bear
the following expenses relating to its operation: taxes, interest, fees of the
Trustees of the Trust, Securities and Exchange Commission fees, outside auditing
and legal expenses, advisory and administration fees, fees and out-of-pocket
expenses of the custodian and fund accountant, certain insurance premiums, costs
of maintenance of the Trust's existence, costs of Shareholders' reports and
meetings, and any extraordinary expenses incurred in the Fund's operation. For
the fiscal period ended December 31, 1997, the Fund's ratio of operating
expenses to average daily net assets (including effects of applicable fee
waivers and expense reimbursements), on an annual basis, was 1.22%.
<PAGE>
Banking Laws
Federal banking laws and regulations presently prohibit a national bank or any
affiliate thereof from sponsoring, organizing or controlling a registered
open-end investment company continuously engaged in the issuance of its shares,
and generally from underwriting, selling or distributing securities, such as
Shares of the Fund.
AmSouth and Rockhaven each believes that it may perform advisory services for
the Fund as described herein and, provided that they do not engage in
underwriting, selling or distribution of the Fund's Shares, their affiliates
believe that they may perform Variable Contract Owner servicing activities and
may receive compensation without violating federal banking laws and regulations.
In the event that, due to future events, either adviser is prohibited from
acting as an investment adviser of the Fund, it is probable that the Board of
Trustees would either recommend to Shareholders the selection of another
qualified adviser or, if that course of action appeared impractical, that the
Fund be liquidated.
Year 2000
The services provided to the Fund by AmSouth, Rockhaven, BISYS, BISYS Ohio, and
the Fund's other service providers (collectively, the "Service Providers") are
dependent on those Service Providers' computer systems. Many computer software
and hardware systems in use today cannot distinguish between the year 2000 and
the year 1900 because of the way dates are encoded and calculated (the "Year
2000 Issue"). The failure to make this distinction could have a negative impact
on the Service Providers' ability to handle securities trades, price securities,
and conduct general account services on behalf of the Fund. The Trust is working
with the Service Providers to take steps that are reasonably designed to address
the Year 2000 Issue with respect to computer systems relied on by the Fund. The
Trust has no reason to believe that these steps will not be sufficient to avoid
any material adverse impact on the Fund, although there can be no assurances.
The costs or consequences of an incomplete or an untimely resolution of the Year
2000 Issue are unknown to the Trust and the Service Providers at this time, but
could have a material adverse impact on the operations of the Fund and the
Service Providers.
TAXATION
The Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). Accordingly, the Fund
generally will not be subject to federal income taxes to the extent that it
distributed on a timely basis its investment company taxable income and its net
capital gains.
To comply with regulations under section 817(h) of the Code, the Fund is
required to diversify its investments. Generally, the Fund will be required to
diversify its investments so that on the last day of each quarter of a calendar
year no more than 55% of the value of its total assets is represented by any one
investment, no more than 70% is represented by any two investments, no more than
80% is represented by any three investments, and no more than 90% is represented
by any four investments. For this purpose, securities of a given issuer
generally are treated as one investment, but each U.S. Government agency and
instrumentality is treated as a separate issuer. Any security issued,
guaranteed, or insured (to the extent so guaranteed or insured) by the U.S. or
an agency or instrumentality of the U.S. is treated as a security issued by the
U.S. Government or its agency or instrumentality, whichever is applicable.
<PAGE>
Compliance with the diversification rules under Section 817(h) of the Code
generally will limit the ability of the Fund to invest greater than 55% of its
total assets in direct obligations of the U.S. Treasury (or any other issuer) or
to invest primarily in securities issued by a single agency or instrumentality
of the U.S. Government. If the Fund fails to meet the diversification
requirement under Section 817(h) of the Code, income with respect to Variable
Contracts invested in the Fund at any time during the calendar quarter in which
the failure occurred could become currently taxable to the owners of such
Variable Contracts and income for prior periods with respect to such contracts
also could be taxable, most likely in the year of the failure to achieve the
required diversification. Other adverse tax consequences could also ensue. If
the Fund failed to qualify as a regulated investment company, the results would
be substantially the same as a failure to meet the diversification requirements
under Section 817(h) of the Code.
The Treasury Department announced that it would issue future regulations or
rulings addressing the circumstances in which a variable contract owner's
control of the investments of the separate account may cause the contract owner,
rather than the insurance company, to be treated as the owner of the assets held
by the separate account. If the contract owner is considered the owner of the
securities underlying the separate account, income and gains produced by those
securities would be included currently in the contract owner's gross income. It
is not known what standards will be set forth in the regulations or rulings.
In the event that rules or regulations are adopted, there can be no assurance
that the Fund will be able to operate as currently described, or that the Trust
will not have to change the Fund's investment objective or investment policies.
While the Fund's investment objective is fundamental and may be changed only by
a vote of a majority of its outstanding Shares, the investment policies of the
Fund may be modified as necessary to prevent any such prospective rules and
regulations from causing Variable Contract Owners to be considered the owners of
the Shares of the Fund.
Reference is made to the prospectus for the Separate Account and Variable
Contract for information regarding the federal income tax treatment of
distributions to the Separate Account. See "ADDITIONAL INFORMATION - Additional
Tax Information" in the Statement of Additional Information for more information
on taxes.
GENERAL INFORMATION
Description of the Trust and Its Shares
The Trust was organized as a Massachusetts business trust in 1994 and currently
consists of four portfolios. Each Share represents an equal proportionate
interest in the Fund with other Shares of the Fund, and is entitled to such
dividends and distributions out of the income earned on the assets belonging to
the Fund as are declared at the discretion of the Trustees. Shares are without
par value. Shareholders are entitled to one vote for each dollar of value
invested and a proportionate fractional vote for any fraction of a dollar
invested. Shareholders will vote in the aggregate and not by portfolio except as
otherwise expressly required by law.
<PAGE>
An annual or special meeting of Shareholders to conduct necessary business is
not required by the Trust's Declaration of Trust, the 1940 Act or other
authority except, under certain circumstances, to elect Trustees, amend the
Declaration of Trust, approve an investment advisory agreement, and to satisfy
certain other requirements. To the extent that such a meeting is not required,
the Trust may elect not to have an annual or special meeting.
The Trust will call a special meeting of Shareholders for purposes of
considering the removal of one or more Trustees upon written request therefor
from Shareholders holding not less than 10% of the outstanding votes of the
Trust. At such a meeting, a quorum of Shareholders (constituting a majority of
votes attributable to all outstanding Shares of the Trust), by majority vote,
has the power to remove one or more Trustees. In accordance with current laws,
it is anticipated that an insurance company issuing a variable contract that
participates in the Fund will request voting instructions from variable contract
owners and will vote Shares or other voting interests in the separate account in
proportion of the voting instructions received. The Separate Account and
qualified pension and retirement plans are currently the only Shareholders of
the Fund, although other separate accounts of Hartford, or of other insurance
companies, may become Shareholders in the future.
Performance Information
From time to time performance information for the Fund showing its average
annual total return, aggregate total return and/or yield may be presented in
advertisements, sales literature and shareholder reports. Such performance
figures are based on historical earnings and are not intended to indicate future
performance. Average annual total return of the Fund will be calculated for the
period since the establishment of the Fund. Average annual total return is
measured by comparing the value of an investment in the Fund at the beginning of
the relevant period to the redemption value of the investment at the end of the
period (assuming immediate reinvestment of any dividends or capital gains
distributions and analyzing the result). Aggregate total return is calculated
similarly to average annual total return except that the return figure is
aggregated over the relevant period instead of annualized. Yield of the Fund
will be computed by dividing the net investment income per Share earned during a
recent one-month period by the per Share maximum offering price (reduced by any
undeclared earned income expected to be paid shortly as a dividend) on the last
day of the period and analyzing the result. Performance information for the Fund
will not be advertised or included in sales literature unless accompanied by
comparable performance information for the Separate Account.
In addition, from time to time the Fund may present its distribution rate in
supplemental sales literature which is accompanied or preceded by a prospectus
and in Shareholder reports. Distribution rates will be computed by dividing the
distribution per Share made by the Fund over a twelve-month period by the
maximum offering price per Share. The calculation of income in the distribution
rate includes both income and capital gain dividends and does not reflect
unrealized gains or losses, although the Fund may also present a distribution
rate excluding the effect of capital gains. The distribution rate differs from
the yield, because it includes capital gains which are often non-recurring in
nature, whereas yield does not include such items.
<PAGE>
Total return and yield are functions of the type and quality of instruments held
in the portfolio, operating expenses, and market conditions. Consequently, total
return and yield will fluctuate and are not necessarily representative of future
results. Quotations of yield or total return for the Fund will not take into
account charges or deductions against the Separate Account or Variable Contract
specific deductions for cost of insurance charges, premium load, administrative
fees, maintenance fees, premium tax, mortality and expense risks, or other
charges that may be incurred under a Variable Contract for which the Fund serves
as an underlying investment vehicle. The Fund's yield and total return should
not be compared with mutual funds that sell their shares directly to the public
since the figures provided do not reflect charges against the Separate Account
or the Variable Contracts. Performance information for the Fund reflects only
the performance of a hypothetical investment in the Fund during the particular
time period on which the calculations are based. In addition, if AmSouth or
BISYS voluntarily reduce all or a part of their respective fees, the total
return of the Fund will be higher than it would otherwise be in the absence of
such voluntary fee reductions.
Miscellaneous
Inquiries regarding the Trust may be directed in writing to the Trust at 3435
Stelzer Road, Columbus, Ohio 43219-3035, or by calling toll free (800) 257-5872.
No person has been authorized to give any information or to make any
representations not contained in this Prospectus in connection with the offering
made by this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Fund or
its Distributor. This Prospectus does not constitute an offering by the Fund or
by its Distributor in any jurisdiction in which such offering may not lawfully
be made.
<PAGE>
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
(800) 257-5872
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1998
This Statement of Additional Information ("SAI") describes four diversified
investment portfolios (the "Funds") of Variable Insurance Funds (the "Trust").
The Funds are:
o BB&T Growth and Income Fund;
o BB&T Capital Manager Fund; *
o AmSouth Regional Equity Fund; * and
o AmSouth Equity Income Fund.
* As of the date of this SAI, the indicated Funds are not available for
investment.
The Trust offers an indefinite number of transferable units ("Shares") of each
Fund. Shares of the Funds currently are sold to segregated asset accounts
("Separate Accounts") of insurance companies to serve as the investment medium
for variable annuity contracts ("Variable Contracts") issued by the insurance
companies. Shares of the Funds also may be 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 the date hereof.
This SAI contains more detailed information than that set forth in a Prospectus
and should be read in conjunction with the Prospectus. This SAI is incorporated
by reference in its entirety into each Prospectus. Copies of a Prospectus may be
obtained by writing the Trust at 3435 Stelzer Road, Columbus, Ohio 43219-3035,
or by telephoning toll free (800) 257-5872.
<PAGE>
TABLE OF CONTENTS
INVESTMENT OBJECTIVES AND POLICIES...............................
Additional Information on the Capital Manager Fund's
Investment Policies Additional Information on Portfolio
Instruments.............................................
INVESTMENT RESTRICTIONS...........................................
Portfolio Turnover.......................................
NET ASSET VALUE...................................................
Valuation of the Funds...................................
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION....................
MANAGEMENT OF THE TRUST...........................................
Trustees and Officers....................................
Investment Advisers......................................
Investment Sub-Adviser...................................
Portfolio Transactions...................................
Glass-Steagall Act.......................................
Administrator............................................
Expenses.................................................
Distributor..............................................
Custodians, Transfer Agent and Fund Accounting Services..
Auditors.................................................
Legal Counsel............................................
ADDITIONAL INFORMATION............................................
Description of Shares....................................
Vote of a Majority of the Outstanding Shares.............
Principal Shareholders...................................
Shareholder and Trustee Liability........................
Additional Tax Information...............................
Performance Information..................................
Miscellaneous............................................
FINANCIAL STATEMENTS..............................................
APPENDIX..........................................................
<PAGE>
The Trust is an open-end management investment company which currently offers
four separate diversified Funds, each with different investment objectives. This
SAI contains information about the following two Funds which, along with the
"Underlying Funds" described below, are advised by Branch Banking and Trust
Company ("BB&T"): the BB&T Growth and Income Fund (the "Growth and Income Fund")
and the BB&T Capital Manager Fund (the "Capital Manager Fund"). In addition,
this SAI contains information about the AmSouth Regional Equity Fund (the
"Regional Equity Fund"), which is advised by AmSouth Bank ("AmSouth"), and the
AmSouth Equity Income Fund ("Equity Income Fund"), which is advised by AmSouth,
with Rockhaven Asset Management, LLC ("Rockhaven") serving as sub-adviser.
Much of the information contained in this SAI expands upon subjects discussed in
the Prospectuses of the Funds described above. Capitalized terms not defined
herein are defined in such Prospectuses. No investment in a Fund should be made
without first reading the Fund's Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
Additional Information on the Capital Manager Fund's Investment Policies
The Capital Manager Fund seeks its investment objective by investing in a
diversified portfolio of one or more of the following funds (the "Underlying
Funds"), all of which are series of The BB&T Mutual Funds Group, an affiliated
open-end management investment company: the BB&T Growth and Income Stock Fund
(the "BB&T Growth and Income Fund"), the BB&T Balanced Fund, the BB&T Small
Company Growth Fund, the BB&T International Equity Fund, the BB&T
Short-Intermediate U.S. Government Income Fund (the "BB&T Short-Intermediate
Fund"), the BB&T Intermediate U.S. Government Bond Fund (the "BB&T Intermediate
Bond Fund"), and the BB&T U.S. Treasury Money Market Fund (the "BB&T U.S.
Treasury Fund"). Accordingly, the investment performance of the Capital Manager
Fund is directly related to the performance of the Underlying Funds, which may
engage in the investment techniques described below. In addition to shares of
the Underlying Funds, for temporary cash management purposes, the Capital
Manager Fund may invest in short-term obligations (with maturities of 12 months
or less) consisting of commercial paper (including variable amount master demand
notes) and obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities. These investments are described below under
"Additional Information on Portfolio Instruments."
Additional Information on Portfolio Instruments
The following policies supplement the investment objectives and policies of the
Funds and the Underlying Funds as set forth in the Prospectuses.
<PAGE>
Bank Obligations. The Growth and Income Fund, the Regional Equity Fund, the
Equity 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 Regional Equity Fund and the Equity Income Fund may also invest in
Eurodollar Certificates of Deposit, which are U.S. dollar denominated
certificates of deposit issued by offices of foreign and domestic banks located
outside the United States; Yankee Certificates of Deposit, which are
certificates of deposit issued by a U.S. branch of a foreign bank denominated in
U.S. dollars and held in the United States; Eurodollar Time Deposits ("ETDs"),
which are U.S. dollar denominated deposits in a foreign branch of a U.S. bank or
a foreign bank; and Canadian Time Deposits, which are basically the same as ETDs
except they are issued by Canadian offices of major Canadian banks.
Commercial Paper. Commercial paper consists of unsecured promissory notes issued
by corporations. Except as noted below with respect to variable amount master
demand notes, issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Variable Amount Master Demand Notes. Variable amount master demand notes, in
which the Funds and the Underlying Funds (except for the BB&T U.S. Treasury
Fund) may invest, are unsecured demand notes that permit the indebtedness
thereunder to vary and provide for periodic adjustments in the interest rate
according to the terms of the instrument. Because master demand notes are direct
lending arrangements between a Fund or Underlying Fund and the issuer, they are
not normally traded. Although there is no secondary market in the notes, a Fund
or Underlying Fund may demand payment of principal and accrued interest at any
time. While the notes are not typically rated by credit rating agencies, issuers
of variable amount master demand notes (which are normally manufacturing,
retail, financial, and other business concerns) must satisfy the same criteria
as set forth above for commercial paper. BB&T, AmSouth and any sub-adviser each
will consider the earning power, cash flow, and other liquidity ratios of the
issuers of such notes and will continuously monitor their financial status and
ability to meet payment on demand. In determining dollar weighted average
portfolio maturity, a variable amount master demand note will be deemed to have
a maturity equal to the longer of the period of time remaining until the next
interest rate adjustment or the period of time remaining until the principal
amount can be recovered from the issuer through demand.
<PAGE>
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
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 the a Fund or Underlying Fund will
receive income on foreign securities in such currencies, it will be required to
compute and distribute income in U.S. dollars. Therefore, if the exchange rate
for any such currency declines materially after income has been accrued and
translated into U.S. dollars, a Fund or Underlying Fund could be required to
liquidate portfolio securities to make required distributions. Similarly, if an
exchange rate declines between the time a Fund or Underlying Fund incurs
expenses in U.S. dollars and the time such expenses are paid, the amount of such
currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater.
<PAGE>
In general, there is a large, liquid market in the United States for many
American Depository 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 depository of
an unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the deposited securities
or to pass through the voting rights to facility holders with respect to the
deposited securities, whereas the depository of a sponsored facility typically
distributes shareholder communications and passes through the voting rights.
Money Market Funds. Each of the Growth and Income Fund, the Regional Equity
Fund, the Equity Income Fund, and the Underlying Funds (except for the BB&T U.S.
Treasury Fund) may invest up to 5% of the value of its total assets in the
securities of any one money market fund (including shares of certain affiliated
money market funds pursuant to an order from the Securities and Exchange
Commission), provided that no more than 10% of such Fund's total assets may be
invested in the securities of money market funds in the aggregate.
In order to avoid the imposition of additional fees as a result of investments
by the Growth and Income Fund, the Regional Equity Fund, the Equity Income Fund,
and the Underlying Funds (except for the BB&T U.S. Treasury Fund) in shares of
affiliated money market funds, BB&T, AmSouth, Rockhaven, 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. 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 Growth and Income Fund, the Regional Equity
Fund, the Equity 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").
<PAGE>
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 BB&T, AmSouth, or a sub-adviser believes that the
credit risk with respect thereto is minimal.
Options Trading. The Growth and Income Fund, the BB&T Small Company Growth Fund,
and the BB&T International Equity Fund may purchase put and call options. The
Regional Equity Fund and the Equity Income Fund may write (sell) "covered" call
options and purchase options to close out options previously written by it. 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
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 Regional Equity Fund and the Equity Income Fund may write only covered call
options. This means that the Regional Equity Fund and the Equity Income Fund
will only write a call option on a security which it already owns. Such options
must be listed on a national securities exchange and issued by the Options
Clearing Corporation. The purpose of writing covered call options is to generate
additional premium income for these Funds. This premium income will serve to
<PAGE>
enhance the Fund's total return and will reduce the effect of any price decline
of the security involved in the option. Covered call options will generally be
written on securities which, in AmSouth's or Rockhaven's opinion, are not
expected to make any major price moves in the near future but which, over the
long term, are deemed to be attractive investments for the Fund. Under normal
conditions, it is not expected that the Regional Equity Fund or the Equity
Income Fund will cause the underlying value of portfolio securities and/or
currencies subject to such options to exceed 25% of its total assets.
Once the decision to write a call option has been made, AmSouth or Rockhaven, in
determining whether a particular call option should be written on a particular
security, will consider the reasonableness of the anticipated premium and the
likelihood that a liquid secondary market will exist for those options. Closing
transactions will be effected in order to realize a profit on an outstanding
call option, to prevent an underlying security from being called, or to permit
the sale of the underlying security. Furthermore, effecting a closing
transaction will permit a Fund to write another call option on the underlying
security with either a different exercise price or expiration date or both. If a
Fund desires to sell a particular security from its portfolio on which it has
written a call option, it will seek to effect a closing transaction prior to, or
concurrently with, the sale of the security. There is, of course, no assurance
that the Fund will be able to effect such closing transactions at a favorable
price. If a Fund cannot enter into such a transaction, it may be required to
hold a security that it might otherwise have sold, in which case it would
continue to be at market risk on the security. This could result in higher
transaction costs. A Fund will pay transaction costs in connection with the
writing of options to close out previously written options. Such transaction
costs are normally higher than those applicable to purchases and sales of
portfolio securities.
Call options written by the Regional Equity Fund and the Equity Income Fund will
normally have expiration dates of less than nine months from the date written.
The exercise price of the options may be below, equal to, or above the current
market values of the underlying securities at the time the options are written.
From time to time, a Fund may purchase an underlying security for delivery in
accordance with an exercise notice of a call option assigned to it, rather than
delivering such security from its portfolio. In such cases, additional costs
will be incurred. A Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security owned by a Fund.
The 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.
<PAGE>
When-Issued and Delayed-Delivery Securities. The Growth and Income Fund, the
Regional Equity Fund, the Equity 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 Growth and Income Fund, the Regional Equity
Fund, the Equity Income Fund, the BB&T Short-Intermediate Fund, the BB&T
Intermediate Bond Fund, the BB&T Balanced Fund, and the BB&T Small Company
Growth Fund each may consistent with its investment objective and policies,
invest in mortgage-related securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities. In addition, each may invest in
mortgage-related securities issued by nongovernmental entities, provided,
however, that to the extent 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
("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
<PAGE>
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
BB&T U.S. Treasury Fund will not purchase Section 4(2) securities which have not
been determined to be liquid in excess of 10% of its net assets. The Growth and
Income Fund, the Regional Equity Fund, the Equity Income Fund, and the
Underlying BB&T Funds (other than the BB&T U.S. Treasury Fund) will not purchase
section 4(2) securities which have not been determined to be liquid in excess of
15% of its net assets. BB&T, AmSouth, Rockhaven 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.
<PAGE>
BB&T, AmSouth, Rockhaven or any other sub-adviser may deem Section 4(2)
securities liquid if it believes that, based on the trading markets for such
security, such security can be disposed of within seven days in the ordinary
course of business at approximately the amount at which the Fund or Underlying
Fund has valued the security. In making such determination, the following
factors, among others, may be deemed relevant: (i) the credit quality of the
issuer; (ii) the frequency of trades and quotes for the security; (iii) the
number of dealers willing to purchase or sell the security and the number of
other potential purchasers; (iv) dealer undertakings to make a market in the
security; and (v) the nature of the security and the nature of market-place
trades.
Treatment of Section 4(2) securities as liquid could have the effect of
decreasing the level of a Fund's or Underlying Fund's liquidity to the extent
that qualified institutional buyers become, for a time, uninterested in
purchasing these securities.
Medium-Grade Debt Securities. The Regional Equity Fund and the Equity Income
Fund 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 Ratings Services ("S&P") or Baa by Moody's Investors Service, Inc.
("Moody's")) or, if not rated, are determined to be of comparable quality
("Medium-Grade Securities").
As with other fixed-income securities, Medium-Grade Securities are subject to
credit risk and market risk. Market risk relates to changes in a security's
value as a result of changes in interest rates. Credit risk relates to the
ability of the issuer to make payments of principal and interest. Medium-Grade
Securities are considered by Moody's to have speculative characteristics.
Medium-Grade Securities are generally subject to greater credit risk than
comparable higher-rated securities because issuers are more vulnerable to
economic downturns, higher interest rates or adverse issuer-specific
developments. In addition, the prices of Medium-Grade Securities are generally
subject to greater market risk and therefore react more sharply to changes in
interest rates. The value and liquidity of Medium-Grade Securities may be
diminished by adverse publicity and investor perceptions.
Because certain Medium-Grade Securities are traded only in markets where the
number of potential purchasers and sellers, if any, is limited, the ability of
the Regional Equity Fund or, the Equity Income Fund to sell such securities at
their fair market value either to meet redemption requests or to respond to
changes in the financial markets may be limited.
<PAGE>
Particular types of Medium-Grade Securities may present special concerns. The
prices of payment-in-kind or zero-coupon securities may react more strongly to
changes in interest rates than the prices of other Medium-Grade Securities. Some
Medium-Grade Securities in which the Regional Equity Fund or the Equity Income
Fund may invest may be subject to redemption or call provisions that may limit
increases in market value that might otherwise result from lower interest rates
while increasing the risk that the Regional Equity Fund or, the Equity Income
Fund may be required to reinvest redemption or call proceeds during a period of
relatively low interest rates.
The credit ratings issued by nationally recognized statistical rating
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, AmSouth and Rockhaven conduct their own independent credit analysis of
Medium-Grade Securities.
High Yield Securities. The Equity Income Fund may invest in high yield
convertible securities. High yield securities are securities that are rated
below investment grade by an NRSRO (e.g., "BB" or lower by S&P and "Ba" or lower
by Moody's). Other terms used to describe such securities include "lower rated
bonds," "non-investment grade bonds" and "junk bonds." Generally, lower rated
securities provide a higher yield than higher rated securities of similar
maturity, but are subject to a greater degree of risk with respect to the
ability of the issuer to meet its principal and interest obligations. Issuers of
high yield securities may not be as strong financially as those issuing higher
rated securities. The securities are regarded as predominantly speculative. The
market value of high yield securities may fluctuate more than the market value
of higher rated securities, since high yield securities tend to reflect
short-term corporate and market developments to a greater extent than higher
rated securities, which fluctuate primarily in response to the general level of
interest rates, assuming that there has been no change in the fundamental
interest rates, assuming that there has been no change in the fundamental
quality of such securities. The market prices of fixed income securities
generally fall when interest rates rise. Conversely, the market prices of fixed
income securities generally rise when interest rates fall.
Additional risks of high yield securities include limited liquidity and
secondary market support. As a result, the prices of high yield securities may
decline rapidly in the event that a significant number of holders decide to
sell. Changes in expectations regarding an individual issuer, an industry or
high yield securities generally could reduce market liquidity for such
securities and make their sale by the Equity Income Fund more difficult, at
least in the absence of price concessions. Reduced liquidity also could
adversely affect the Equity Income Fund's ability to accurately value high yield
securities. Issuers of high yield securities also are more vulnerable to real or
perceived economic changes (for instance, an economic downturn or prolonged
period of rising interest rates), political changes or adverse developments
specific to the issuer. Adverse economic, political or other developments may
impair the issuer's ability to service principal and interest obligations, to
meet projected business goals and to obtain additional financing, particularly
if the issuer is highly leveraged. In the event of a default, the Equity Income
Fund would experience a reduction of its income and could expect a decline in
the market value of the defaulted securities.
<PAGE>
Repurchase Agreements. Securities held by the Growth and Income Fund, the
Regional Equity Fund, the Equity Income Fund and the Underlying Funds may be
subject to repurchase agreements. Under the terms of a repurchase agreement, a
Fund or Underlying Fund would acquire securities from member banks of the
Federal Deposit Insurance Corporation and registered broker-dealers that BB&T,
AmSouth or Rockhaven 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 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 market conditions or foreign exchange rates which otherwise
might adversely affect the value of securities which a Fund or Underlying Fund
holds or intends to purchase. For example, when interest rates are expected to
rise or market values of portfolio securities are expected to fall, a Fund or an
Underlying Fund can seek through the sale of futures contracts to offset a
decline in the value of its portfolio securities. When interest rates are
expected to fall or market values are expected to rise, a Fund or Underlying
Fund, through the purchase of such contracts, can attempt to secure better rates
or prices than might later be available in the market when it effects
anticipated purchases.
The acquisition of put and call options on futures contracts will, respectively,
give a Fund or an Underlying Fund the right (but not the obligation), for a
specified price, to sell or to purchase the underlying futures contract, upon
exercise of the option, at any time during the option period.
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 Regional Equity Fund, the
Equity Income 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.
<PAGE>
The BB&T International Equity Fund does not intend 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. This 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 its securities or other assets denominated in
that currency. The BB&T International Equity Fund's custodian bank segregates
cash or liquid securities in an amount not less than the value of the Underlying
Fund's total assets committed to forward 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 the Underlying Fund's
commitments with respect to such contracts. The BB&T International Equity Fund
generally does not enter into a forward contract with a Term longer than one
year.
Foreign Currency Options. A foreign currency option provides the Growth and
Income 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 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, 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.
<PAGE>
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: (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 and repurchase agreements secured by obligations of the U.S.
Government or its agencies or instrumentalities; (b) wholly owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of their parents;
(c) the Capital Manager Fund may invest more than 25% of its total assets in
investment companies, or portfolios thereof, that are Underlying Funds of such
Fund; and (d) utilities will be divided according to their services. For
example, gas, gas transmission, electric and gas, electric and telephone will
each be considered a separate industry.
<PAGE>
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 the Capital Manager Fund may invest in
any investment company;
3. Borrow money or issue senior securities, except that a Fund may
borrow from banks or brokers, in amounts up to 10% of the value of its total
assets at the time of such borrowing. A Fund will not purchase securities while
its borrowings exceed 5% of its total assets;
4. Make loans, except that a Fund may purchase or hold debt instruments
and lend portfolio securities (in an amount not to exceed one-third of its total
assets), in accordance with its investment objective and policies, make time
deposits with financial institutions and enter into repurchase agreements;
5. Underwrite the securities issued by other persons, except to the
extent that a Fund may be deemed to be an underwriter under certain securities
laws in the disposition of "restricted securities;"
6. Purchase or sell commodities or commodities contracts, except to the
extent disclosed in the current Prospectus of the Fund; and
7. Purchase or sell real estate (although investments in marketable
securities of companies engaged in such activities and securities secured by
real estate or interests therein, or in Underlying Funds investing in such
securities, are not prohibited by this restriction).
The following additional investment restrictions are not fundamental policies
and therefore may be changed without the vote of a majority of the outstanding
Shares of a Fund. None of the Funds may:
1. Engage in any short sales (except for short sales "against the box");
2. Purchase securities of other investment companies, except (a) in
connection with a merger, consolidation, acquisition or reorganization, (b) to
the extent permitted by the 1940 Act or pursuant to any exemptions therefrom,
and (c) as consistent with the investment policies of the Capital Manager Fund;
<PAGE>
3. Mortgage or hypothecate the Fund's assets in excess of one-third of
the Fund's total assets; and
4. Purchase or otherwise acquire any securities if, as a result, more
than 15% of the Fund's net assets would be invested in securities that are
illiquid.
If any percentage restriction described above is satisfied at the time of
purchase, a later increase or decrease in such percentage resulting from a
change in net asset value will not constitute a violation of such restriction.
However, should a change in net asset value or other external events cause a
Fund's investments in illiquid securities to exceed the limitation set forth in
such Fund's Prospectus, that Fund will act to cause the aggregate amount of
illiquid securities to come within such limit as soon as reasonably practicable.
In such an event, however, that Fund would not be required to liquidate any
portfolio securities where the Fund would suffer a loss on the sale of such
securities.
Due to the investment policies of the Capital Manager Fund, this Fund will
concentrate more than 25% of its total assets in the investment company
industry. However, no Underlying Fund in which such Fund invests will
concentrate more than 25% of its total assets in any one industry.
Portfolio Turnover
Changes may be made in a Fund's portfolio consistent with the investment
objective and policies of the Fund whenever such changes are believed to be in
the best interests of the Fund and its Shareholders. The portfolio turnover
rates for all of the Funds may vary greatly from year to year as well as within
a particular year, and may be affected by cash requirements for redemptions of
Shares and by requirements which enable the Funds to receive certain favorable
tax treatments. High portfolio turnover rates will generally result in higher
transaction costs to a Fund, including brokerage commissions.
The portfolio turnover rate of the Capital Manager Fund is expected to be low,
as such Fund will purchase or sell shares of the Underlying Funds, to (i)
accommodate purchases and sales of such Fund's Shares, and (ii) change the
percentage of its assets invested in each Underlying Fund in which it invests in
response to market conditions. The Growth and Income Fund, the Regional Equity
Fund and the Equity Income Fund will be managed without regard to its portfolio
turnover rate. It is anticipated that the annual portfolio turnover rate for an
Underlying Fund normally will not exceed the amount stated in such Underlying
Fund's Prospectus. For the period ended December 31, 1997, the portfolio
turnover rate for each operational Fund was as follows: Growth and Income Fund -
7.75%; Equity Income Fund - 4.00%.
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.
<PAGE>
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, Inc. ("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, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas.
Valuation of the Funds
Portfolio securities, the principal market for which is a securities exchange,
will be valued at the closing sales price on that exchange on the day of
computation, or, if there have been no sales during such day, at the latest bid
quotation. Portfolio securities, the principal market for which is not a
securities exchange, will be valued at their latest bid quotation in such
principal market. If no such bid price is available, then such securities will
be valued in good faith at their respective fair market values using methods
determined by or under the supervision of the Board of Trustees. Foreign
securities are valued based on quotations from the primary market in which they
are traded and are translated from the local currency into U.S. dollars using
current exchange rates. Portfolio securities with a remaining maturity of 60
days or less will be valued either at amortized cost or original cost plus
accrued interest, which approximates current value.
All other assets and securities, including securities for which market
quotations are not readily available, will be valued at their fair market value
as determined in good faith under the general supervision of the Board of
Trustees.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Shares of each Fund are sold on a continuous basis by the Distributor, and
the Distributor has agreed to use appropriate efforts to solicit all purchase
orders. The public offering price of Shares of the Funds is their net asset
value per Share.
The Trust may suspend the right of redemption or postpone the date of payment
for Shares during any period when (a) trading on the NYSE is restricted by
applicable rules and regulations of the Securities and Exchange Commission, (b)
the NYSE is closed for other than customary weekend and holiday closings, (c)
the Securities and Exchange Commission has by order permitted such suspension,
or (d) an emergency exists as a result of which (i) disposal by the Trust of
securities owned by it is not reasonably practical or (ii) it is not reasonably
practical for the Trust to determine the fair market value of its net assets.
<PAGE>
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:
<TABLE>
<S> <C>
Name, Address, and Age Principal Occupation During Past 5 Years
- ---------------------- ----------------------------------------
James H. Woodward Chancellor, University of North Carolina at Charlotte.
University of North Carolina
at Charlotte
Charlotte, NC 28223
Age: 58
Michael Van Buskirk Chief Executive Officer, Ohio Bankers Association
37 West Broad Street (industry trade association).
Suite 1001
Columbus, OH 43215
Age: 51
Walter B. Grimm* Employee of BISYS Fund Services (6/92-present).
3435 Stelzer Road
Columbus, Oh 43219
Age: 51
</TABLE>
* Mr. Grimm is an "interested person" of the Trust as that term is defined in
the 1940 Act.
<PAGE>
The Trust pays each Trustee who is not an employee of BISYS or its affiliates a
retainer fee at the rate of $500 per calendar quarter, reasonable out-of-pocket
expenses, $500 for each regular meeting of the Board of Trustees attended in
person, and $250 for each regular meeting of the Board of Trustees attended by
telephone. The Trust also pays each such Trustee $500 for each special meeting
of the Board of Trustees attended in telephone, and $250 for each special
meeting of the Board of Trustees attended by telephone. For the fiscal year
ended December 31, 1997, the Trust paid the following compensation to the
Trustees of the Trust:
<TABLE>
<S> <C> <C>
Aggregate Compensation Total Compensation from
Name from Trust* Trust and Fund Complex**
James H. Woodward $3,000 $ 14,430
Michael Van Buskirk $3,000 $ 3,000
Walter B. Grimm $0 $ 0
</TABLE>
* The Trust does not accrue pension or retirement benefits as part of
Fund expenses, and Trustees of the Trust are not entitled to benefits
upon retirement from the Board of Trustees.
** The Fund Complex consisted of the Trust, Qualivest Funds, the
Tax-Free Trust of Oregon, The BB&T Mutual Funds Group and AmSouth
Mutual Funds.
The officers of the Trust, their addresses, ages, and principal occupations
during the past five years are as follows (unless otherwise indicated, the
address of each officer is 3435 Stelzer Road, Columbus, OH 43219):
<TABLE>
<S> <C> <C>
Position(s) Held Principal Occupation
Name and Address With the Trust During Past 5 Years
- ---------------- ---------------- -------------------
Richard Ille President and Chief Executive Employee of BISYS Fund Services
Age: 33 Officer (7/90 - present).
Walter Grimm Vice President Employee of BISYS Fund Services
Age: 51 (6/92-present).
Carl Juckett Vice President Employee of BISYS Services (7/94 -
Age: 43 present); Manager, Broker/Dealer
and Investment Accounting Systems,
Huntington Bank (1/89 - 7/94).
Frank Deutchki Vice President Employee of BISYS Fund Services
Age: 44 (4/96 - present); Vice President,
Audit Director at Mutual
Funds Services
Company, a subsidiary
of United States
Trust Company
of New York (2/89 - 3/96).
Dana Gentile Vice President and Secretary Employee of BISYS Fund Services
Age: 35 (1987 - present).
<PAGE>
Gregory Maddox Vice President and Assistant Employee of BISYS Fund Services
Columbia Square Secretary (4/91 - present).
Suite 500
1230 Columbia Street
San Diego, CA 92101
Age: 28
John Calvano Vice President and Assistant Employee of BISYS Fund Services
Age: 38 Secretary (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, and Employee of BISYS Fund Services
Age: 39 Principal Financial and (4/87 - present).
Accounting Officer
Alaina Metz Assistant Secretary Employee of BISYS Fund Services
Age: 30 (6/95 - present); Supervisor,
Mutual Fund Legal Department,
Alliance Capital Management (5/89
- 6/95).
</TABLE>
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 April 1, 1998, the Trustees and officers of the Trust, as a group, owned
Variable Contracts that entitled them to give voting instructions with respect
to less than one percent of the Shares of any Fund of the Trust.
<PAGE>
Investment Advisers
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the Funds' investment objectives and restrictions, investment
advisory services are provided to the Growth and Income Fund and the Capital
Manager Fund by BB&T, 434 Fayetteville Street Mall, Raleigh, NC 27601, pursuant
to an Investment Advisory Agreement dated June 1, 1997 (the "BB&T Investment
Advisory Agreement").
BB&T is the oldest bank in North Carolina and is the principal bank affiliate of
Southern National Corporation ("SNC"), a bank holding company that is a North
Carolina corporation, headquartered in Winston-Salem, North Carolina.
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the Funds' investment objectives and restrictions, investment
advisory services are provided to the Regional Equity Fund and the Equity Income
Fund by AmSouth, 1901 Sixth Avenue North, Birmingham, AL 35203, pursuant to an
Investment Advisory Agreement dated September 16, 1997 (the "AmSouth Investment
Advisory Agreement").
AmSouth is the principal bank affiliate of AmSouth Bancorporation, one of the
largest banking institutions headquartered in the mid-south region.
Under the Investment Advisory Agreements, BB&T and AmSouth (the "Investment
Advisers") have agreed to provide, either directly or through one or more
sub-advisers, investment advisory services for each of the Funds as described in
the Prospectus. For the services provided and expenses assumed pursuant to the
BB&T Investment Advisory Agreement, each of the following Funds pays BB&T a fee,
computed daily and paid monthly, at the following annual rates, calculated as a
percentage of the average daily net assets of such Fund: 0.74% for the Growth
and Income Fund, and 0.25% for the Capital Manager Fund. For the period from
June 3, 1997 (commencement of operations) through December 31, 1997, the Growth
and Income Fund incurred investment advisory fees equal to $65,023, of which
$33,638 was waived or reimbursed by BB&T. For the services provided and expenses
assumed pursuant to the AmSouth Investment Advisory Agreement, each of the
Regional Equity Fund and the Equity Income Fund pays AmSouth a fee, computed
daily and paid monthly, at the annual rate of 0.60%, calculated as a percentage
of the average daily net assets of such Fund. For the period from October 23,
1997 (commencement of operations) through December 31, 1997, the Equity Income
Fund incurred investment advisory fees equal to $1,234, of which $1,234 was
waived or reimbursed by AmSouth.
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.
<PAGE>
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.
Investment Sub-Adviser
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the Fund's investment objective and restrictions, investment
sub-advisory services are provided to the Equity Income Fund by Rockhaven, 100
First Avenue, Suite 1050, Pittsburgh, PA 15222, pursuant to a sub-advisory
agreement with AmSouth dated September 16, 1997 (the "Sub-Advisory Agreement").
Rockhaven is 50% owned by AmSouth and 50% owned by Mr.
Christopher H. Wiles.
Under the Sub-Advisory Agreement, Rockhaven (the "Sub-Adviser") has agreed to
provide investment advisory services for the Equity Income Fund as described in
the Prospectus. For its services and expenses incurred under the Sub-Advisory
Agreement, Rockhaven is entitled to a fee payable by AmSouth. The fee is
computed daily and paid monthly at an annual rate of 0.36% of the Fund's average
daily net assets or such lower fee as may be agreed upon in writing by AmSouth
and Rockhaven, provided that if AmSouth waives a portion of its investment
advisory fee, the Sub-Adviser has agreed that its sub-advisory fee shall not
exceed 60% of AmSouth's net investment advisory fee. For the period from October
23, 1997 (commencement of operations) through December 31, 1997, no sub-advisory
fees were paid by AmSouth to Rockhaven.
Unless sooner terminated, the Sub-Advisory Agreement shall continue with respect
to the Equity Income Fund for an initial term of two years, and thereafter for
successive one-year periods if such continuance is approved at least annually by
the Board of Trustees of the Trust or by vote of the holders of a majority of
the outstanding voting Shares of the Fund and a majority of the Trustees who are
not parties to the Sub-Advisory Agreement or interested persons (as defined in
the 1940 Act) of any party to the Sub-Advisory Agreement by vote cast in person
at a meeting called for such purpose. The Agreement may be terminated with
respect to the Fund by the Trust at any time without the payment of any penalty
by the Board of Trustees of the Trust, by vote of the holders of a majority of
the outstanding voting securities of the Fund, or by the Investment Advisor or
Sub-Advisor on 60 days' written notice. This Agreement will also immediately
terminate in the event of its assignment, as defined in the 1940 Act.
The Sub-Advisory Agreement provides that Rockhaven shall not be liable for any
error of judgment or mistake of law or for any loss suffered by AmSouth, the
Trust or the Fund in connection with the performance of its duties, except that
Rockhaven shall be liable to AmSouth for a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of Rockhaven in the performance of its duties or from reckless disregard by
it of its obligations or duties thereunder.
<PAGE>
From time to time, advertisements, supplemental sales literature and information
furnished to present or prospective Variable Contract Owners may include
descriptions of Rockhaven including, but not limited to, (i) descriptions of
Rockhaven's operations; (ii) descriptions of certain personnel and their
functions; and (iii) statistics and rankings relating to Rockhaven's operations.
Portfolio Transactions
The Investment Advisers and the Sub-Adviser determine, subject to the general
supervision of the Board of Trustees and in accordance with each Fund's
investment objective and restrictions, which securities are to be purchased and
sold by a Fund, and which brokers or dealers are to be eligible to execute such
Fund's portfolio transactions.
Purchases and sales of portfolio securities which are debt securities usually
are principal transactions in which portfolio securities are normally purchased
directly from the issuer or from an underwriter or market maker for the
securities. Purchases from underwriters of portfolio securities generally
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers serving as market makers may include the spread between
the bid and asked price. Transactions on stock exchanges involve the payment of
negotiated brokerage commissions. Transactions in the over-the-counter market
are generally principal transactions with dealers. With respect to the
over-the-counter market, the Trust, where possible, will deal directly with
dealers who make a market in the securities involved except in those
circumstances where better price and execution are available elsewhere.
Allocation of transactions, including their frequency, to various brokers and
dealers is determined by each Investment Adviser or Sub-Adviser in its best
judgment and in a manner deemed fair and reasonable to Shareholders. In
selecting a broker or dealer, each Investment Adviser or Sub-Adviser evaluates a
wide range of criteria, including the commission rate or dealer mark-up,
execution capability, the broker's/dealer's positioning and distribution
capabilities, back office efficiency, ability to handle difficult trades,
financial stability, reputation, prior performance, and, in the case of
brokerage commissions, research. The primary consideration is the broker's
ability to provide prompt execution of orders in an effective manner at the most
favorable price for the security. Subject to this consideration, brokers and
dealers who provide supplemental investment research to an Investment Adviser or
Sub-Adviser may receive orders for transactions on behalf of the Trust. Research
may include brokers' analyses of specific securities, performance and technical
statistics, and information databases. It may also include maintenance research,
which is the information that keeps an Investment Adviser or Sub-Adviser
informed concerning overall economic, market, political and legal trends. Under
some circumstances, an Investment Adviser's or Sub-Adviser's evaluation of
research and other broker selection criteria may result in one or a few brokers
executing a substantial percentage of a Fund's trades. This might occur, for
example, where a broker can provide best execution at a cost that is reasonable
in relation to its services and the broker offers unique or superior research
facilities, special knowledge or expertise in a Fund's relevant markets, or
access to proprietary information about companies that are a majority of a
Fund's investments.
Research information so received is in addition to and not in lieu of services
required to be performed by each Investment Adviser or Sub-Adviser and does not
reduce the fees payable to an Investment Adviser or Sub-Adviser by the Trust.
Such information may be useful to an Investment Adviser or Sub-Adviser in
serving both the Trust and other clients and, conversely, supplemental
information obtained by the placement of business of other clients may be useful
in carrying out its obligations to the Trust. While each Investment Adviser or
Sub-Adviser generally seeks competitive commissions, the Trust may not
necessarily pay the lowest commission available on each brokerage transaction
for reasons discussed above.
<PAGE>
Investment decisions for each Fund are made independently from those for the
other Funds or any other portfolio, investment company or account managed by
BB&T, AmSouth or Rockhaven. Any such other portfolio, investment company or
account may also invest in the same securities as the Trust. When a purchase or
sale of the same security is made at substantially the same time on behalf of a
Fund and another Fund, portfolio, investment company or account, the transaction
will be averaged as to price and available investments will be allocated as to
amount in a manner which the Investment Adviser or Sub-Adviser believes to be
equitable to the Fund(s) and such other portfolio, investment company or
account. In some instances, this investment procedure may adversely affect the
price paid or received by a Fund or the size of the position obtained by a Fund.
To the extent permitted by law, the Investment Adviser or Sub-Adviser may
aggregate the securities to be sold or purchased for a Fund with those to be
sold or purchased for the other Funds or for other portfolio, investment
companies or accounts in order to obtain best execution. In making investment
recommendations for the Trust, an Investment Adviser or Sub-Adviser will not
inquire or take into consideration whether an issuer of securities proposed for
purchase or sale by the Trust is a customer of the Investment Adviser, the
Sub-Adviser or BISYS, their parents or their subsidiaries or affiliates and, in
dealing with its customers, BB&T, AmSouth, Rockhaven, their parents,
subsidiaries, and affiliates will not inquire or take into consideration whether
securities of such customers are held by the Trust.
For the period from June 3, 1997 (commencement of operations) through December
31, 1997, the Growth and Income Fund paid aggregate brokerage commissions equal
to $34,811 on $26,273,001 of securities transactions. For the period from
October 23, 1997 (commencement of operations) through December 31, 1997, the
Equity Income Fund paid aggregate brokerage commissions equal to $2,520 on
$1,874,299 of securities transactions.
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.
<PAGE>
The Investment Advisers and the Sub-Adviser believe that they possess the legal
authority to perform the services for the Funds contemplated by the
Prospectuses, this SAI, the Investment Advisory Agreements and the Sub-Advisory
Agreement without violation of applicable statutes and regulations. Future
changes in either federal or state statutes and regulations relating to the
permissible activities of banks or bank holding companies and the subsidiaries
or affiliates of those entities, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could prevent an Investment Adviser or the Sub-Adviser from continuing to serve
as investment adviser to the Funds or could restrict the services which it is
permitted to perform for the Funds. In addition, such changes, decisions or
interpretations could prevent an Investment Adviser's or Sub-Adviser's
affiliates from performing Variable Contract Owner servicing activities or from
receiving compensation therefor or could restrict the types of services such
entities are permitted to provide and the amount of compensation they are
permitted to receive for such services. Depending upon the nature of any changes
in the services which could be provided by the Investment Advisers or the
Sub-Adviser, the Board of Trustees would review the Trust's relationship with
the Investment Advisers or the Sub-Adviser 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 BB&T and AmSouth under the Investment
Advisory Agreements, by Rockhaven under the Sub-Advisory Agreement, 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
periodic reports to the Securities and Exchange Commission on Form N-SAR or any
replacement forms therefor; compile data for, prepare for execution by the Funds
and file certain federal and state tax returns and required tax filings; prepare
compliance filings pursuant to state laws with the advice of the Trust's
counsel; keep and maintain the financial accounts and records of the Funds,
including calculation of daily expense accruals; and generally assist in all
aspects of the Trust's operations other than those performed by the Investment
Advisers under the Investment Advisory Agreements, by the Sub-Adviser under the
Sub-Advisory Agreement, 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) a fee
calculated at the annual rate of 0.20% of each Fund's average daily net assets,
or (b) such other fee as may from time to time be agreed upon by the Trust and
the Administrator. The Administrator may voluntarily reduce all or a portion of
its fee with respect to any Fund in order to increase the net income of one or
more of the Funds available for distribution as dividends. For the period from
June 3, 1997 (commencement of operations) through December 31, 1997, the Growth
and Income Fund incurred administration fees equal to $17,514, of which $13,138
was waived or reimbursed by BISYS. For the period from October 23, 1997
(commencement of operations) through December 31, 1997, the Equity Income Fund
incurred administration fees equal to $411, of which $411 was waived or
reimbursed by BISYS.
<PAGE>
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
Distribution Agreement may be terminated in the event of any assignment, as
defined in the 1940 Act.
Custodians, Transfer Agent and Fund Accounting Services
Fifth Third Bank, 38 Fountain Square Plaza, Cincinnati, Ohio 45263, serves as
custodian to the Trust with respect to the Growth and Income Fund and the
Capital Manager Fund pursuant to a Custody Agreement dated as of May 21, 1997.
AmSouth serves as custodian to the Trust with respect to the Regional Equity
Fund and the Equity Income Fund pursuant to a Custody Agreement dated as of
September 16, 1997. Each custodian's responsibilities include safeguarding and
controlling the Funds' cash and securities, handling the receipt and delivery of
securities, and collecting interest and dividends on such Funds' investments.
<PAGE>
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.
Legal Counsel
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006, is
counsel to the Trust and has passed upon the legality of the Shares offered
hereby.
ADDITIONAL INFORMATION
Description of Shares
The Trust is a Massachusetts business trust. 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 nine series of Shares which represent interests in each
series of the Trust. The Trust's Declaration of Trust authorizes the Board of
Trustees to divide or redivide any unissued Shares of the Trust into one or more
additional series or classes by setting or changing in any one or more respects
their respective preferences, conversion or other rights, voting power,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption.
<PAGE>
Shares have no subscription or preemptive rights and only such conversion or
exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectuses and this SAI, the Trust's
Shares will be fully paid and non-assessable by the Trust. In the event of a
liquidation or dissolution of the Trust, Shareholders of a Fund are entitled to
receive the assets available for distribution belonging to that Fund, and a
proportionate distribution, based upon the relative asset values of the
respective series, of any general assets not belonging to any particular series
which are available for distribution.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of an investment company
such as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding Shares of each Fund
affected by the matter. For purposes of determining whether the approval of a
majority of the outstanding Shares of a Fund will be required in connection with
a matter, a Fund will be deemed to be affected by a matter unless it is clear
that the interests of each Fund in the matter are identical, or that the matter
does not affect any interest of the Fund. Under Rule 18f-2, the approval of an
investment advisory agreement or any change in investment policy submitted to
Shareholders would be effectively acted upon with respect to a series only if
approved by a majority of the outstanding Shares of such Fund. However, Rule
18f-2 also provides that the ratification of independent public accountants, the
approval of principal underwriting contracts, and the election of Trustees may
be effectively acted upon by Shareholders of the Trust voting without regard to
Fund.
Vote of a Majority of the Outstanding Shares
As used in the Funds' Prospectuses and the SAI, "vote of a majority of the
outstanding Shares of the Trust or the Fund" means the affirmative vote, at an
annual or special meeting of Shareholders duly called, of the lesser of (a) 67%
or more of the votes of Shareholders of the Trust or the Fund present at such
meeting at which the holders of more than 50% of the votes attributable to the
Shareholders of record of the Trust or the Fund are represented in person or by
proxy, or (b) the holders of more than 50% of the outstanding votes of
Shareholders of the Trust or the Fund.
Principal Shareholders
As of April 1, 1998, Hartford Life Insurance Company Separate Account Two, 200
Hopmeadow Street, Simsbury, Connecticut 06070 owned 30.5% and Wilbranch, P.O.
Box 2887, Wilson, North Carolina 27894 owned 68.6% of the outstanding Shares of
the Growth and Income Fund, and thus may be deemed to be able to control the
outcome of any matter submitted to a vote of the Shareholders of that Fund. As
of the same date, Hartford Life Insurance Company Separate Account Two owned
98.08% of the outstanding Shares of the Equity Income Fund, and thus may be
deemed to be able to control the outcome of any matter submitted to a vote of
the Shareholders of that Fund.
<PAGE>
Shareholder and Trustee Liability
Under Massachusetts law, holders of units of interest in a business trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. However, the Trust's Declaration of Trust provides
that Shareholders shall not be subject to any personal liability for the
obligations of the Trust. The Declaration of Trust provides for indemnification
out of the trust property of any Shareholder held personally liable solely by
reason of his or her being or having been a Shareholder. The Declaration of
Trust also provides that the Trust shall, upon request, reimburse any
Shareholder for all legal and other expenses reasonably incurred in the defense
of any claim made against the Shareholder for any act or obligation of the
Trust, and shall satisfy any judgment thereon. Thus, the risk of a Shareholder
incurring financial loss on account of Shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations.
The Declaration of Trust states further that no Trustee, officer, or agent of
the Trust shall be personally liable in connection with the administration or
preservation of the assets of the Trust or the conduct of the Trust's business;
nor shall any Trustee, officer, or agent be personally liable to any person for
any action or failure to act except for his own bad faith, willful misfeasance,
gross negligence, or reckless disregard of his duties. The Declaration of Trust
also provides that all persons having any claim against the Trustees or the
Trust shall look solely to the assets of the Trust for payment.
Additional Tax Information
The following discussion summarizes certain U.S. federal tax considerations
incidental to an investment in a Fund. 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) diversify its holdings so that, at the end of each quarter
of the taxable year (a) at least 50% of the market value of the Fund's assets is
represented by cash, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other securities
of any one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (b) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. Government securities or the securities of other regulated investment
companies); and (iii) distribute at least 90% of its investment company taxable
income (which includes, among other items, dividends, interest, and net
short-term capital gains in excess of any net long-term capital losses) each
taxable year.
As a regulated investment company, a Fund generally will not be subject to U.S.
federal income tax on its investment company taxable income and net capital
gains (any net long-term capital gains in excess of the sum of net short-term
capital losses and capital loss carryovers from prior years), if any, that it
distributes to Shareholders. Each Fund intends to distribute to its
Shareholders, at least annually, substantially all of its investment company
taxable income and any net capital gains. In addition, amounts not distributed
by a Fund on a timely basis in accordance with a calendar year distribution
requirement may be subject to a nondeductible 4% excise tax. To avoid the tax, a
Fund may be required to distribute (or be deemed to have distributed) during
each calendar year, (i) at least 98% of its ordinary income (not taking into
account any capital gains or losses) for the calendar year, (ii) at least 98% of
its capital gains in excess of its capital losses for the twelve month period
ending on October 31 of the calendar year (adjusted for certain ordinary
losses), and (iii) all ordinary income and capital gains for previous years that
were not distributed during such years. To avoid application of the excise tax,
each Fund intends to make its distributions in accordance with the calendar year
distribution requirement. A distribution will be treated as paid on December 31
of the calendar year if it is declared by a Fund during October, November, or
December of that year to Shareholders of record on a date in such a month and
paid by the Fund during January of the following calendar year. Such
distributions will be taxable to Shareholders (such as the Separate Accounts)
for the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are actually received.
<PAGE>
If a Fund invests in shares of a foreign investment company, the Fund may be
subject to U.S. federal income tax on a portion of an "excess distribution"
from, or of the gain from the sale of part or all of the shares in, such
company. In addition, an interest charge may be imposed with respect to deferred
taxes arising from such distributions or gains.
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time a Fund accrues income or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and the
time that Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss. Similarly, on
disposition of debt securities denominated in a foreign currency and on
disposition of certain futures contracts, forward contracts, and options, gains
or losses attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security or contract and the date of disposition
also are treated as ordinary gain or loss. These gains or losses, referred to
under the Code as "Section 988" gains or losses, may increase or decrease the
amount of a Fund's investment company taxable income to be distributed to its
Shareholders as ordinary income.
Distributions
Distributions of any investment company taxable income (which includes among
other items, dividends, interest, and any net realized short-term capital gains
in excess of net realized long-term capital losses) are treated as ordinary
income for tax purposes in the hands of a Shareholder (such as a Separate
Account). Net capital gains (the excess of any net long-term capital gains over
net short term capital losses) will, to the extent distributed, be treated as
long-term capital gains in the hands of the Separate Accounts regardless of the
length of time a Separate Account may have held the Shares; the rate of tax for
non-corporate taxpayers, however, will depend upon the Fund's holding period in
the assets whose sale produces the gain.
Hedging Transactions
The diversification requirements applicable to a Fund's assets may limit the
extent to which a Fund will be able to engage in transactions in options,
futures contracts, or forward contracts.
Other Taxes
Distributions may also be subject to additional state, foreign and local taxes,
depending on each shareholder's situation. Shareholders are advised to consult
their own tax advisers with respect to the particular tax consequences to them
of an investment in a Fund.
<PAGE>
Performance Information
Each Fund may, from time to time, include its yield or total return in
advertisements or reports to Shareholders or prospective investors. Performance
information for the Funds will not be advertised or included in sales literature
unless accompanied by comparable performance information for a separate account
to which the Funds offer their Shares.
Yields of the Funds are computed by analyzing net investment income per Share
for a recent 30-day period and dividing that amount by a Share's maximum
offering price (reduced by any undeclared earned income expected to be paid
shortly as a dividend) on the last trading day of that period. Net investment
income will reflect amortization of any market value premium or discount of
fixed income securities (except for obligations backed by mortgages or other
assets) and may include recognition of a pro rata portion of the stated dividend
rate of dividend paying portfolio securities. The yield of each Fund will vary
from time to time depending upon market conditions, the composition of the
Fund's portfolio and operating expenses of the Trust allocated to the Fund.
Yield should also be considered relative to changes in the value of a Fund's
Shares and to the relative risks associated with the investment objective and
policies of each of the Funds. For the 30-day period ended December 31, 1997,
the yield for each operational Fund was as follows: 1.38% for the Growth and
Income Fund; and 2.35% for the Equity Income Fund.
At any time in the future, yields may be higher or lower than past yields and
there can be no assurance that any historical results will continue.
Standardized quotations of average annual total return for Fund Shares will be
expressed in terms of the average annual compounded rate of return for a
hypothetical investment in Shares over periods of 1, 5 and 10 years or up to the
life of the Fund), calculated pursuant to the following formula: P(1 + T)n = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All total
return figures reflect the deduction of expenses (on an annual basis), and
assume that all dividends and distributions on Shares are reinvested when paid.
For the period from its commencement of operations (indicated in parentheses)
through December 31, 1997, total return for each operational Fund was as
follows: 19.96% for the Growth and Income Fund (June 3, 1997); and 2.27% for the
Equity Income Fund (October 23, 1997).
Performance information for the Funds may be compared in reports and promotional
literature to the performance of other mutual funds with comparable investment
objectives and policies through various mutual fund or market indices such as
those prepared by Dow Jones & Co., Inc., S&P, Shearson Lehman Brothers, Inc. and
The Russell 2000 Index and to data prepared by Lipper Analytical Services, Inc.,
a widely recognized independent service which monitors the performance of mutual
funds, Morningstar, Inc. and the Consumer Price Index. Comparisons may also be
made to indices or data published in Money Magazine, Forbes, Barron's, The Wall
Street Journal, The Bond Buyer's Weekly 20-Bond Index, The Bond Buyer's Index,
The Bond Buyer, The New York Times, Business Week, Pensions and Investments, and
U.S.A. Today. In addition to performance information, general information about
these Funds that appears in a publication such as those mentioned above may be
included in advertisements and in reports to Variable Contract Owners.
<PAGE>
Each Fund may also compute aggregate total return for specified periods. The
aggregate total return is determined by dividing the net asset value of this
account at the end of the specified period by the value of the initial
investment and is expressed as a percentage. Calculation of aggregate total
return assumes reinvestment of all income dividends and capital gain
distributions during the period.
The Funds also may quote annual, average annual and annualized total return and
aggregate total return performance data for various periods other than those
noted above. Such data will be computed as described above, except that the
rates of return calculated will not be average annual rates, but rather, actual
annual, annualized or aggregate rates of return.
Quotations of yield or total return for the Funds will not take into account
charges and deductions against a Separate Account to which the Funds' Shares are
sold or charges and deductions against the Variable Contracts. The Funds' yield
and total return should not be compared with mutual funds that sell their shares
directly to the public since the figures provided do not reflect charges against
the Separate Accounts or the Variable Contracts. Performance information for any
Fund reflects only the performance of a hypothetical investment in the Fund
during the particular time period in which the calculations are based.
Performance information should be considered in light of the Funds' investment
objectives and policies, characteristics and quality of the portfolios and the
market conditions during the given time period, and should not be considered as
a representation of what may be achieved in the future.
Miscellaneous
Individual Trustees are elected by the Shareholders and, subject to removal by
the vote of two-thirds of the Board of Trustees, serve for a term lasting until
the next meeting of Shareholders at which Trustees are elected. Such meetings
are not required to be held at any specific intervals. Individual Trustees may
be removed by vote of the Shareholders voting not less than a majority of the
Shares then outstanding, cast in person or by proxy at any meeting called for
that purpose, or by a written declaration signed by Shareholders voting not less
than two-thirds of the Shares then outstanding. In accordance with current laws,
it is anticipated that an insurance company issuing a Variable Contract that
participates in the Funds will request voting instructions from variable
contract owners and will vote shares or other voting interests in the Separate
Account in proportion of the voting instructions received. The Separate Accounts
and qualified pension and retirement plans currently are the only Shareholders
of the Funds, although other Separate Accounts 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 Prospectuses and this SAI omit certain of the information contained in the
Registration Statement filed with the Securities and Exchange Commission. Copies
of such information may be obtained from the Securities and Exchange Commission
upon payment of the prescribed fee.
The Prospectuses and this SAI are not an offering of the securities herein
described in any state in which such offering may not lawfully be made. No
salesman, dealer, or other person is authorized to give any information or make
any representation other than those contained in the Prospectuses and this SAI.
<PAGE>
FINANCIAL STATEMENTS
Financial statements for the Trust as of December 31, 1997 for its fiscal year
then ended, including notes thereto and the reports of Coopers & Lybrand L.L.P.
thereon dated February 9, 1998, are incorporated by reference from the Trust's
1997 Annual Reports. A copy of the Reports delivered with this SAI should be
retained for future reference.
<PAGE>
APPENDIX
DESCRIPTION OF BOND RATINGS
Description of Moody's bond ratings:
Excerpts from Moody's description of its bond ratings are listed as
follows: Aaa - judged to be the best quality and they carry the smallest degree
of investment risk; Aa - judged to be of high quality by all standards -
together with the Aaa group, they comprise what are generally known as
high-grade bonds; A - possess many favorable investment attributes and are to be
considered as "upper medium grade obligations"; Baa - considered to be medium
grade obligations, i.e., they are neither highly protected nor poorly secured
- -interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time; Ba - judged to have speculative
elements, their future cannot be considered as well assured; B - generally lack
characteristics of the desirable investment; Caa - are of poor standing - such
issues may be in default or there may be present elements of danger with respect
to principal or interest; Ca - speculative in a high degree, often in default; C
- - lowest rated class of bonds, regarded as having extremely poor prospects.
Moody's also supplies numerical indicators 1, 2 and 3 to rating
categories. The modifier 1 indicates that the security is in the higher end of
its rating category; the modifier 2 indicates a mid-range ranking; and modifier
3 indicates a ranking toward the lower end of the category.
Description of S&P's bond ratings:
Excerpts from S&P's description of its bond ratings are listed as
follows: AAA - highest grade obligations, in which capacity to pay interest and
repay principal is extremely strong; AA - has a very strong capacity to pay
interest and repay principal, and differs from AAA issues only in a small
degree; A - has a strong capacity to pay interest and repay principal, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories; BBB
- - regarded as having an adequate capacity to pay interest and repay principal;
whereas it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category than in
higher rated categories. This group is the lowest which qualifies for commercial
bank investment. BB, B, CCC, CC, C - predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with terms of the
obligations; BB indicates the highest grade and C the lowest within the
speculative rating categories. D interest or principal payments are in default.
<PAGE>
S&P applies indicators "+," no character, and "-" to its rating
categories. The indicators show relative standing within the major rating
categories.
Description of Moody's ratings of short-term municipal obligations:
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or MIG. Such ratings recognize the
differences between short-term credit and long-term risk. Short-term ratings on
issues with demand features (variable rate demand obligations) are
differentiated by the use of the VMIG symbol to reflect such characteristics as
payment upon periodic demand rather than fixed maturity dates and payments
relying on external liquidity. Ratings categories for securities in these groups
are as follows: MIG 1/VMIG 1 - denotes best quality, there is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing; MIG 2/VMIG 2 - denotes high
quality, margins of protection are ample although not as large as in the
preceding group; MIG 3/VMIG 3 - denotes high quality, all security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades; MIG 4/VMIG 4 - denotes adequate quality, protection commonly regarded as
required of an investment security is present, but there is specific risk; SQ -
denotes speculative quality, instruments in this category lack margins of
protection.
Description of Moody's commercial paper ratings:
Excerpts from Moody's commercial paper ratings are listed as follows:
Prime - 1 - issuers (or supporting institutions) have a superior ability for
repayment of senior short-term promissory obligations; Prime - 2 - issuers (or
supporting institutions) have a strong ability for repayment of senior
short-term promissory obligations; Prime - 3 - issuers (or supporting
institutions) have an acceptable ability for repayment of senior short-term
promissory obligations; Not Prime - issuers do not fall within any of the Prime
categories.
Description of S&P's ratings for corporate and municipal bonds:
Investment grade ratings: AAA - the highest rating assigned by S&P,
capacity to pay interest and repay principal is extremely strong; AA - has a
very strong capacity to pay interest and repay principal and differs from the
highest rated issues only in a small degree; A - has strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories; BBB - regarded as having an adequate capacity to pay
interest and repay principal - whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
<PAGE>
Speculative grade ratings: BB, B, CCC, CC, C - debt rated in these
categories is regarded as having predominantly speculative characteristics with
respect to capacity to pay interest and repay principal - while such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions; CI - reserved
for income bonds on which no interest is being paid; D -in default, and payment
of interest and/or repayment of principal is in arrears. Plus (+) or Minus (-) -
the ratings from "AA" to "CCC" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Description of S&P's rating for municipal notes and short-term municipal demand
obligations:
Rating categories are as follows: SP-1 - has a very strong or strong
capacity to pay principal and interest - those issues determined to possess
overwhelming safety characteristics will be given a plus (+) designation; SP-2 -
has a satisfactory capacity to pay principal and interest; SP-3 - issues
carrying this designation have a speculative capacity to pay principal and
interest.
Description of S&P's ratings for short-term corporate demand obligations and
commercial paper:
An S&P commercial paper rating is a current assessment of the
likelihood of timely repayment of debt having an original maturity of no more
than 365 days. Excerpts from S&P's description of its commercial paper ratings
are listed as follows: A-1 - the degree of safety regarding timely payment is
strong - those issues determined to possess extremely strong safety
characteristics will be denoted with a plus (+) designation; A-2 capacity for
timely payment is satisfactory - however, the relative degree of safety is not
as high as for issues designated "A-1;" A-3 - has adequate capacity for timely
payment - however, is more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations; B - regarded as
having only speculative capacity for timely payment; C - a doubtful capacity for
payment; D - in payment default - the "D" rating category is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Included in Part A:
Included in Part B:
Report of Independent Accountants dated February 9, 1998
Audited financial statements relating to the BB&T Growth and
Income Fund and AmSouth Equity Income Fund as of
December 31, 1997, including:
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Schedule of Investments
Notes to Financial Statements
Financial Highlights
(b) Exhibits
(1) (a) Amended and Restated Declaration of Trust dated July 20,
1994, as amended and restated February 5, 1997(1)
(b) Establishment and Designation of Series effective
February 5, 1997(1)
(c) Redesignation of Two Existing Series and Establishment
and Designation of Two Additional Series effective
August 13, 1997(3)
(2) By-Laws(1)
(3) Not Applicable
(4) Articles V and VI of the Registrant's Amended and Restated
Declaration of Trust define rights of holders of Shares.
(5) (a) Form of Investment Advisory Agreement between Registrant
and Qualivest Capital Management Inc.(2)
(b) Form of Investment Advisory Agreement between
Registrant and Branch Banking and Trust Company(2)
(c) Form of Investment Advisory Agreement between
Registrant and AmSouth Bank(4)
(d) Form of Sub-Advisory Agreement between AmSouth Bank and
Rockhaven Asset Management, LLC(4)
(6) Form of Distribution Agreement between Registrant and BISYS
Fund Services(3)
(7) Not Applicable
(8) (a) Form of Custodian Agreement between Registrant and
United States National Bank of Oregon(2)
(b) Form of Custodian Agreement between Registrant and
Fifth Third Bank(2)
(c) Form of Custodian Agreement between Registrant and
AmSouth Bank(4)
(9) (a) Form of Management and Administration Agreement between
the Registrant and BISYS Fund Services(3)
C-1
<PAGE>
(b) Form of Fund Accounting Agreement between the
Registrant and BISYS Fund Services Ohio, Inc.(3)
(c) Form of Transfer Agency Agreement between the
Registrant and BISYS Fund Services Ohio, Inc.(3)
(d) Form of Fund Participation Agreement with Hartford Life
Insurance Company(4)
(e) Form of Participation Agreement with Nationwide Life
and Annuity Insurance Company*
(f) Form of Variable Contract Owner Servicing Agreement(3)
(10) Opinion and Consent of Counsel(2)
(11) Consent of Independent Auditors
(12) Not Applicable
(13) Purchase Agreement(2)
(14) Not Applicable
(15) Not Applicable
(16) Schedule of Computation of Performance Information
(17) Financial Data Schedule Pursuant to Rule 483 (filed as
Exhibit 27)
(18) Not Applicable
(19) (a) Secretary's Certificate Pursuant to Rule 483(b)(2)
(b) Powers of Attorney(2)
- ----------
* To be filed by amendment.
1 Filed with Pre-Effective Amendment No. 2 to Registrant's Registration
Statement on February 5, 1997.
2 Filed with Pre-Effective Amendment No.2 to Registrant's Registration
Statement on May 29, 1997.
3 Filed with Post-Effective Amendment No. 1 to Registrant's Registration
Statement on July 3, 1997.
4 Filed with Post-Effective Amendment No. 2 to Registrant's Registration
Statement on September 15, 1997.
C-2
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant
Not applicable
Item 26. Number of Record Holders
There are two shareholders of record as of the date of this filing.
Item 27. Indemnification
Reference is made to Article IV of the Registrant's Agreement and
Declaration of Trust (Exhibit 1(a)) which is incorporated by reference
herein.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant by the Registrant pursuant to the Fund's
Declaration of Trust, its By-Laws or otherwise, the Registrant is aware
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and,
therefore, is unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by trustees, officers or
controlling persons of the Registrant in connection with the successful
defense of any act, suit or proceeding) is asserted by such trustees,
officers or controlling persons in connection with shares being
registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issues.
Item 28. Business and Other Connections of Investment Advisers and their
Officers and Directors
The business of each of the Investment Advisers is summarized under
"MANAGEMENT OF THE FUND" in the Prospectuses constituting Part A of
this Registration Statement, which summaries are incorporated herein by
reference.
C-3
<PAGE>
Set forth below is information as to any other business, vocation or
employment of a substantial nature (other than service in wholly owned
subsidiaries or the parent corporation of Branch Banking and Trust
Company) in which each director or senior officer of Branch Banking and
Trust Company is, or at any time during the past two fiscal years has
been, engaged for his own account or in the capacity of director,
officer, employee, partner or trustee.
Name and Position with Branch Other business, profession,
Banking and Trust Company vocation, or employment
John A. Allison IV None
Chairman of the Board and
Chief Executive Officer
Paul B. Barringer President and Chief Executive Officer
Director Coastal Lumber Company
Weldon, N.C.
W. R. Cuthbertson, Jr. None
Director
Ronald E. Deal Investor, Chairman Wesley Hall
Director Hickory, N.C.
Albert J. Dooley, Sr. Dooley, Dooley, Spence & Parker
Director Lexington, S.C.
Joseph L. Dudley, Sr. Owner
Director Dudley Products
Kernersville, S.C.
Tom D. Efird President
Director Standard Distributors, Inc.
Gastonia, N.C.
O. William Fenn, Jr. NC Department of Commerce,
Director Furniture Export Office
High Point, N.C.
Paul S. Goldsmith BB&T Insurance Services, Inc.
Director Greenville, S.C.
Dr. Lloyd Vincent Hackley President NC System of Community
Director Colleges
Raleigh, N.C.
C-4
<PAGE>
Ernest F. Hardee Ernest Francis Realty Corp.,
Director Hardee Realty Corporation
Portsmouth, VA
James A. Hardison None
Director
Dr. Richard Janeway Executive Vice President for Healthirs
Director Affairs
Bowman Gray School of Medicine
Winston-Salem, N.C.
J. Ernest Lathem, M.D. Urology Specialist, Prostate/Diagnostics
Director Greenville, S.C.
James H. Maynard Chairman & CEO
Director Investors Management Corporation
Raleigh, N.C.
Joseph A. McAleer, Jr. Chief Executive Officer and Director
Director Krispy Kreme Doughnut Corp.
Winston-Salem, N.C.
Albert O. McCauley Secretary and Treasurer
Director Quick Stop Food Marts, Inc.,
McCauley Moving & Storage of
Fayetteville, Inc.
Fayetteville, N.C.
James Dickson McLean, Jr. Attorney at Law, President
Director McLean, Stacy, Henry & McLean, P.A.
Lumberton, N.C.
Charles E. Nichols Attorney at Law, North Carolina Trust
Center
Greensboro, N.C.
L. Glenn Orr, Jr. Orr Management Company
Director Winston-Salem, N.C.
A. Winniett Peters Standard Commercial Tobacco Company
Director Wilson, N.C.
Richard L. Player, Jr. President
Director Player, Inc.
Fayetteville, N.C.
C. Edward Pleasants, Jr. President, CEO & Director
Director Pleasants Hardware Company
Winston-Salem, N.C.
C-5
<PAGE>
Nido R. Qubein Chief Executive Officer
Director Creative Services, Inc.
High Point, N.C.
A. Tab Williams, Jr. Chairman & CEO
Director A.T. Williams Oil Company
Winston-Salem, N.C.
Set forth below is information as to any other business, vocation or
employment of a substantial nature (other than service in wholly owned
subsidiaries or the parent corporation of AmSouth Bank) in which each
director or senior officer of AmSouth Bank is, or at any time during
the past two fiscal years has been, engaged for his own account or in
the capacity of director, officer, employee, partner or trustee.
Name and Position with Other business, profession, AmSouth Bank vocation,
AmSouth Bank or employment
George W. Barber, Jr. Chairman of the Board, Barber Dairies, Inc.,
Director 39 Barber Ct., Birmingham, Alabama
William D. Biggs Real Estate Investments
Director
William J. Cabaniss, Jr. President, Precision Grinding Inc.,
Director P.O. Box 19925, Birmingham, Alabama
M. Miller Gorrie President and Chief Executive Officer,
Director Brasfield and Gorrie General Contractor Inc.,
729 30th Street South, Birmingham, Alabama
James I. Harrison, Jr. President and Chief Executive Officer,
Director Harco, Inc., 3925 Rice Mine Road,
Tuscaloosa, Alabama
Mrs. H. Taylor Morrisette HTM Investment & Development, Inc.,
Director 3 Taylor Place, Mobile, Alabama
C-6
<PAGE>
C. Dowd Ritter None
Director, Chairman,
President and Chief
Executive Officer
Michael C. Baker None
Senior Executive Vice
President
David B. Edmonds None
Executive Vice President
James W. Emison None
Executive Vice President
Sloan D. Gibson, IV None
Senior Executive Vice
President
O.B. Grayson Hall, Jr. None
Executive Vice President
Kristen M. Hudak None
Senior Executive Vice
President and Chief
Financial Officer
John D. Kottmeyer None
Executive Vice President
and Treasurer
W. Charles Mayer, III None
Director and Senior
Executive Vice President
Candice W. Rogers None
Senior Executive Vice
President
Robert R. Windelspecht None
Executive Vice President
and Controller
Stephen A. Yoder None
Executive Vice President
and General Counsel
C-7
<PAGE>
Item 29. Principal Underwriter
(a) BISYS Fund Services ("BISYS") acts as distributor and
administrator for Registrant. BISYS also distributes the
securities of The Victory Portfolios, The Highmark Group,
The AmSouth Mutual Funds, The Sessions Group, The Coventry
Group, The BB&T Mutual Funds Group, The American Performance
Funds, The ARCH Funds, Inc., MMA Praxis Mutual Funds, The
MarketWatch Funds, The Pacific Capital Funds, The Parkstone
Group of Funds, The Riverfront Funds, Inc., The Summit
Investment Trust, The Fountain Square Funds, The Kent Group
of Funds, The HSBC Funds, The Infinity Mutual Funds, Inc.,
The Time Horizon Funds, Pegasus Funds, The Parkstone
Advantage Funds, SBSF Funds, Inc. d.b.a. Key Mutual Funds,
Inc., The Republic Funds and First Choice Funds Trust, each
of which is an investment management company.
(b) Partners of BISYS Fund Services are as follows:
Positions and Positions and
Name and Principal Offices with Offices with
Business Address BISYS Fund Services Registrant
BISYS Fund Services, Inc. Sole General Partner None
3435 Stelzer Road
Columbus, Ohio 43219-3035
WC Subsidiary Corporation Sole Limited Partner None
3435 Stelzer Road
Columbus, Ohio 43219-3035
(c) Not Applicable
C-8
<PAGE>
Item 30. Location of Accounts and Records
The accounts, books, and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of
1940 and rules promulgated thereunder are in the possession of Branch
Banking and Trust Company, 434 Fayetteville Street Mall, Raleigh, NC
27601, and AmSouth Bank, 1901 Sixth Avenue North, Birmingham, Alabama
35203 (records relating to their functions as advisers for Registrant),
BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio 43219-3035
(records relating to its functions as general manager, administrator
and distributor), and BISYS Fund Services Ohio, Inc., 3435 Stelzer
Road, Columbus, Ohio 43219-3035 (records relating to its functions as
transfer agent).
Item 31. Management Services
Not Applicable
Item 32. Undertakings
(a) Not Applicable
(b) Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest Annual Report
to Shareholders, upon request and without charge.
(c) Registrant undertakes to call a meeting of Shareholders for the
purpose of voting upon the question of removal of a Trustee or
Trustees when requested to do so by the holders of at least 10%
of the Registrant's outstanding shares of beneficial interest and
in connection with such meeting to comply with the shareholders
communications provisions of Section 16(c) of the Investment
Company Act of 1940.
C-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment No.4 to its Registration Statement to be signed on its
behalf by the undersigned thereunto duly authorized in the city of Washington,
D.C. on the 29th day of April, 1998.
VARIABLE INSURANCE FUNDS
By: ________*_________
Richard Ille
President and Chief Executive Officer
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form N-1A has been signed below by the following
persons on behalf of Variable Insurance Funds in the capacity and on the date
indicated:
Signatures Title Date
________*__________ President (Prin- April 29, 1998
Richard Ille cipal Executive Officer)
________*__________ Treasurer (Prin- April 29, 1998
William Tomko cipal Accounting
Officer), and
Chief Financial Officer
________*__________ Trustee April 29, 1998
Walter Grimm
________*__________ Trustee April 29, 1998
Michael Van Buskirk
________*________ Trustee April 29, 1998
James Woodward
* By: /s/ Keith T. Robinson
Keith T. Robinson as attorney-in-fact, pursuant to powers of attorney
filed as Exhibit 19(b) to Pre-Effective Amendment No.2 to the
Registrant's Registration Statement.
C-10
<PAGE>
EXHIBIT LIST
Exhibit No. Exhibit Name EDGAR Exhibit No.
11 Consent of Independent EX-99.B11
Auditors
16 Schedule of Computation
of Performance Information EX-99.B16
27 Financial Data Schedule EX-27
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation in this Post-Effective Amendment No. 4 to the
Registration Statement on Form N-1A (File No. 33-81800) of the Variable
Insurance Funds, of our reports dated February 9, 1998 on our audits of the
financial statements of the BB&T Growth and Income Fund and the AmSouth Equity
Income Fund which reports are incorporated by reference in the Statement of
Additional Information. We also consent to the reference to our Firm under the
captions "Financial Highlights" and "Other Service Providers" in the
Prospectuses and "Auditors" in the Statement of Additional Information relating
to the Variable Insurance Funds in this Post-Effective Amendment No. 4 to the
Registration Statement on Form N-1A (File No. 33-81800).
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
April 29, 1998
VARIABLE INSURANCE FUNDS
EXHIBIT 16
TOTAL RETURN
DATE AS OF: 12/31/97
================================================================================
*****No Load Section*****
================================================================================
BB&T Growth and Income Fund
AGGREGATE TOTAL RETURN
WITH SALES LOAD OF: 0.00%
T=(ERV/P) - 1
WHERE: T = TOTAL RETURN
ER REDEEMABLE VALUE AT THE END
OF THE PERIOD OF A HYPOTHETICAL
$1,000 INVESTMENT MADE AT THE
BEGINNING OF THE PERIOD.
P = A HYPOTHETICAL INITIAL INVESTMENT OF $1,000.
EXAMPLE:
SINCE INCEPTION: ( 06/03/97 TO 12/31/97):
( 1199.63 /1,000) -1 = 19.96%
YEAR TO DATE: ( 06/03/97 TO 12/31/97):
( 1199.63 /1,000) -1 = 19.96%
QUARTERLY: ( 09/30/97 TO 12/31/97):
( 1051.00 /1,000) -1 = 5.10%
MONTHLY: ( 12/01/97 TO 12/31/97):
( 1033.80 /1,000) -1 = 3.38%
<PAGE>
================================================================================
*****No Load Section*****
================================================================================
AmSouth Equity Income Fund
AGGREGATE TOTAL RETURN
WITH SALES LOAD OF: 0.00%
T = (ERV/P) - 1
WHERE: T = TOTAL RETURN
ER REDEEMABLE VALUE AT THE END
OF THE PERIOD OF A HYPOTHETICAL
$1,000 INVESTMENT MADE AT THE
BEGINNING OF THE PERIOD.
P = A HYPOTHETICAL INITIAL INVESTMENT OF $1,000.
EXAMPLE:
SINCE INCEPTION: ( 10/23/97 TO 12/31/97):
( 1022.66 /1,000) - 1 = 2.27%
YEAR TO DATE: ( 10/23/97 TO 12/31/97):
( 1022.66 /1,000) - 1 = 2.27%
QUARTERLY: ( 09/30/97)TO 12/31/97):
( 0.00 /1,000) - 1 = #N/A
MONTHLY: ( 12/01/97) TO 12/31/97):
( 1035.80 /1,000 - 1 = 3.58%
================================================================================
================================================================================
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